Loans:  Tighter Lending Restrictions That Affect Real Estate Transactions

The last couple of years have brought with it tighter lending requirements that have prevented many potential homebuyers from qualifying for a home loan.  What you may or may not know is that there has not been one specific period in which these changes have taken place rather it has been at best a dodge ball tournament.  It is a matter of when and at what hour! 

The amount of requirements imposed by the large investors who purchase pools of Mortgage Backed Securities, aka MBS are scrutinizing these pools of loans for what in their eyes are less than desirable borrowers.  The changes are consistently changing weekly, daily and sometimes hourly. 

Despite the efforts by Fannie Mae, Freddie Mac, FHA and the VA to tighten their guideline requirements, the investors have and continue to impose layers of what they believe are an insulation to any unforeseen risk.  These layers are called “Guideline Overlays”.   These so-called “Overlays” have paralyzed parts of the industry and has left many Loan Officers, REALTORS and potential homeowners scrambling to ensure their loan is approved let alone keep the deal in one piece. 

Timing can be everything when it comes to “Overlays”.  It is not uncommon to have a client pre-approved one day to only have him denied at the underwriter’s desk on the next day.   Although it can be complex, the reasons are simple.   The time between a pre-approval and a final approval, a guideline can change within a moment’s notice, forcing the underwriter to deny the loan.  We use the word “Force” since the same underwriter very well would have approved the loan before the mandate.  The financial goal behind an underwriter’s decision is to ensure the salability of the loan.  Who is going to buy this loan on the secondary market (Wall Street)?  Thus the lender and underwriter is forced to comply to the investor’s overlay requirement. 

Overlays have definitely made the mortgage process of obtaining and approving a home loan more stressful and also have limited the access to home loans to the consumer. 

Example of overlays:

FHA says:                           

A borrower must have a minimum FICO score of 580

Investor says:

We will not buy any loan that has less than a 620 FICO score

FHA says:

We are waiving the 90 day seasoning rule.

Investors say:                   

We will not buy any loan that exceeds 120% of the property investors purchase price

Some investors say:      

We will buy the loan so long there are (2) two independent appraisals conducted that support each others findings.

Fannie Mae says:            

We are limiting the DTI (Debt to Income) Ratios to 50% Max.

Investors say:                   

We are limiting the DTI to a 45% Max.

Some investors say:      

We will allow up to 50% DTI, only if they have a 720+ FICO Score

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