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Last July, Fannie Mae began accepting loans with debt to income (DTI) ratios up to 50%. This is much higher than that allowable under the Truth Lending Act (TILA) for a Qualified Mortgage (QM).
However, TILA offers an exception to the QM rules for loans that get approved by Fannie’s Automated Underwriting System (AUS). For now, as long as the loan meets all other QM criteria, a Fannie AUS approved a loan with a DTI above 43% is good to go.
Good news for lenders, consumers, Realtors, and builders. But, how about the private mortgage insurers? They are taking some of the additional risk connected to these high DTI loans with less than a 20% down payment.
Having some experience with these loans, the mortgage insurers are now taking a much closer look. They don’t like what they see. They believe that Fannie’s system allows too much layering of risk which could lead to increased defaults for loans falling into this category. That’s not good for anybody.
So, the mortgage insurers are pulling back on offering coverage for these higher DTI loans, regardless of the Fannie AUS approval. They will insure some but under much stricter guidelines, requiring a higher credit score, more down payment, or others.
In a time when mortgage business is becoming much harder to come by, this is not good news for lenders. The new guidelines will make it much more difficult for lenders to qualify high-risk potential homebuyers.
On the other hand, fewer buyers qualifying for homes may reduce some demand making it easier for qualified buyers to find homes. This could help to stabilize home prices making more homes affordable to all potential buyers.
If you’re going to do these higher DTI loans, be sure to do your homework. You don’t want to spin your wheels on loans that may get approved by Fannie but either can’t get PMI or can get the coverage needed but at a prohibitive cost.
The last thing you want to do is create loans that may default. You can bet that both Fannie and the MI’s will audit these loans very carefully in the event of a default, looking to put the responsibility on someone else. That someone else could be you!
If you plan to move forward on high DTI loans, be sure you know the game, the rules, and the MI guidelines. Analyze these loans carefully for your approval and through your pre and post-close QC process.
An ounce of detection is worth a pound of correction.
