WASHINGTON — No doubt about it, Fannie Mae will be making it tougher for all Americans--particularly young ones seeking to be first-time homeowners--to buy a home.
The Federal National Mortgage Assn., the nation's largest supplier of home mortgage funds, is tightening its underwriting guidelines to alleviate foreclosure problems. In essence, effective Oct. 15, the new FNMA guidelines will increase the required amount of income a borrower needs to qualify for a mortgage with a down payment of less than 10%. Housing expenses must soon be limited to 25% of gross income, and total debt expenses must be no more than 33% of income.
FNMA pointed out that the purchaser of an existing house costing $76,500 would make a 5% down payment of $3,800 and have a total mortgage of $72,700. At a 12.2% fixed-mortgage rate for a 30-year period, $859 would be required for the monthly PITI (principal, interest, taxes and insurance payment). Under the old FNMA rules, an income of $36,814 would qualify the potential buyer. But the new guidelines would require an income of $41,232.
Mortgage professionals expect a general tightening of all conventional mortgage-granting guidelines because FNMA is a pacesetter in the private mortgage industry. However, observers here also expect the higher income requirement to result in more young buyers choosing VA or FHA mortgages that have much lower down-payment requirements. It is not unusual for buyers using FHA financing to put only 3% to 5% down on a home purchase. But FHA mortgages have ceilings that restrict loans to what are the middle-priced houses--usually those with mortgages of less than $90,000.
Because of the impending tighter rules for mortgages that will be bought by FNMA, some thrift institutions have been doing a stronger than usual late-summer business in loan applications--to avoid the tighter rules effective in October.
Meanwhile, the National Assn. of Realtors reacted sharply to the stricter mortgage rules. NAR contended that foreclosure problems could have been alleviated better by requiring full disclosure of the elements that make up the property value in an appraisal by using a cash-equivalent value that would show the risk of loss to the mortgage holder.
The tighter Fannie Mae loan standards also caused concern to the National Assn. of Home Builders whose president, John J. Koelemij, said that FNMA "may have gone too far" because the new guidelines will disqualify thousands of potential home buyers. He added that foreclosures associated with 5% down-payment loans are obviously somewhat riskier, but also contended that the changes made by FNMA are not supported by bad-loan data.
In addition to the requirement for higher incomes of potential home buyers, the Fannie Mae guidelines also will eliminate interest-rate buy downs used by builders to make the early years of paying off a mortgage easier for young buyers. To wit--monthly payments are lower the first few years but rise later. Also, the total cost of the house is often higher because of the additional financing cost to the builder-developer.
The Mortgage Bankers Assn. of America has estimated that nearly 3 million families could be adversely affected by the stricter income requirements to get a mortgage that will eventually be owned by FNMA. However, that number of households (meaning those with incomes in the range of $36,800 to $41,200) includes many who already own houses. Also, it was pointed out, available, attractive financing usually has a substantial impact on home prices. Thus, the tightening by FNMA could make some homes more affordable because sellers would be working with a lesser number of qualified buyers.