News

Five changes to mortgage loans under new Fannie, Freddie rules
By Andrew Housser, WDAM - Laurel, MS

Many home buyers are seeking to take advantage of lower home prices, lower interest rates and possibly the federal first-time home buyer tax credit (which expires Dec. 1, 2009). But before launching into a mortgage loan -- likely the biggest debt you will ever incur -- buyers should be aware of how mortgage borrowing has changed.

The U.S. mortgage industry largely follows rules established by Fannie Mae and Freddie Mac -- two very large government-sponsored enterprises that purchase mortgages from the lenders that originate home loans. Fannie Mae and Freddie Mac back nearly half of all U.S. home loans.

As most home buyers may know, the two agencies suffered huge losses in the mortgage meltdown. To save them, the U.S. government bailed them out last September. Afterward, Fannie Mae and Freddie Mac imposed new restrictions on loans they would purchase after April 1 in order to make mortgage lending more secure. Unfortunately for buyers, these new rules also raise the fees on most mortgages. Here is a look at the changes:

1. Appraisals lower -- and costlier
Many would-be home buyers are finding that appraisals on desired properties are coming in lower than anticipated. Some appraisals are significantly lower, to the point that purchases are put in peril. Appraisers now are under significant scrutiny and are acting very conservatively when it comes to valuing homes. Additionally, appraisers will only count comparative property figures from the last three months. Because home sales have slowed, appropriate comps may be few and far between. Plus, Fannie Mae and Freddie Mac are requiring appraisers to complete additional research and reporting on all appraisals. Many appraisers are charging more for this extra work.

What to do: Allow plenty of time for a home deal to go through, so that you can seek a reappraisal or restructure the loan if needed. Talk frankly with your mortgage lender about what to do if the appraisal is too low. Be prepared to pay for appraisals up front, and pay more than in the past.

2. New risk-based pricing
This spring, Fannie Mae and Freddie Mac introduced new risk-based pricing models that charge additional fees to borrowers with lower credit scores. Called Loan Level Price Adjustments, the fees affect just about every borrower with a credit score lower than 740.

What to do: This trend demonstrates yet again why it is important to maintain the best credit score possible. Before going to a mortgage lender, do your best to improve your credit score by paying bills on time, paying down debt and then keeping debt levels low.

3. Points come into play
While borrowers have always had the option to pay points (or discount points) to lower their interest rate, today, buyers often need to pay points just to obtain advertised rates. Points are a percentage of the purchase price paid upfront to obtain a lower annual percentage rate on the loan.

What to do: One point equals 1 percent of the loan amount. Whether buying points is worthwhile depends in part on how long you plan to stay in the home; the longer you plan on living in your new home, the more likely it is that buying points will make economic sense. If you do pay points, bear in mind that they are usually tax-deductible on your federal income tax return.

4. Higher mortgage processing fees
For every type of mortgage, borrowers are paying higher fees for underwriting, loan processing, appraisals, and sometimes even to lock in a certain interest rate. In the past few years, with "no-doc" loans and less stringent standards, underwriting was less complex. Today, mortgage loans are closely scrutinized, and borrowers are paying for that scrutiny.

What to do: Anticipate that mortgage fees will total as much as 3 percent of your loan amount.

5. Condos face tight restrictions
Condominium buyers face even tighter rules. Fees are higher, and mortgages may be rejected altogether if the borrower's down payment or credit score is not high enough, or if too many condo owners in the complex are delinquent on their association fees. For new buildings, the agencies will not back mortgages unless 70 percent of units have been sold. Buyers face higher loan fees if they do not put down at least 25 percent of the purchase price, and some buyers report not being able to attain financing at all.

What to do: Plan to accumulate a significant down payment before buying, and be sure to obtain pre-approval for a mortgage before identifying a property.

The good news for the economy is that these rules are a reaction to a mortgage-lending industry that had spiraled out of control. For individual buyers, the new regulations can be a headache. But for those who are well prepared to purchase, these rules will not prevent you from buying a piece of the American dream.