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Fannie Tightens Guidelines on Prior Foreclosures, Bankruptcies

Elapsed time increased, some LTVs lowered

June 26, 2008

By MortgageDaily.com staff

Fannie Mae has notified its sellers about tougher requirements for borrowers with prior bankruptcies or foreclosures. The company has also tightened its policies for borrowers who purchase a new residence and convert their existing residence to a second home or investor property.

On manually underwritten mortgages, loan applicants who have filed a Chapter 13 bankruptcy must now wait four years from their dismissal date before qualifying for a loan with Fannie, according to Announcement 08-16 issued Wednesday. Previously, applicants were only required to wait two years from the discharge date. The 2-year discharge requirement remains in place.

On all other types of bankruptcies, the secondary lender now requires that at least four years have elapsed from both the discharge date and the dismissal date. Exceptions to two years are possible under extenuating circumstances. Previously, only the discharge date was considered.

Applicants who have filed bankruptcy more than once are now required to wait five years before qualifying for a conforming loan, though an exception for three years can be made under extenuating circumstances. Fannie previously had no policy on multiple bankruptcies.

For prospects who have previously had a foreclosure, the Washington, D.C.-based company bumped the minimum elapsed time to five years from four years of the date the sale was completed. Exceptions to three years are possible with extenuating circumstances.

Borrowers with prior foreclosures must make a 10 percent downpayment and have a minimum credit score of 680. Only owner-occupied properties will be financed, and cash-out refinances are not permitted.

The minimum elapsed time for borrowers with a prior deed-in-lieu foreclosure remains at four years, but at least 10 percent down is required and cashout refinances are prohibited. Exceptions to two years are still available.

On pre-foreclosure sales, borrowers will now have to wait at least two years from the completion date.

With borrowers who have an existing residence that is pending sale but won't close prior to the new purchase, both payments must be used in debt-to-income calculations.

For borrowers that are converting their current residence into a second home, both payments must be used in the DTI calculation and the borrowers must have six months of payment reserves, including taxes and insurance, for both properties. When the loan-to-value on the current property is no more than 70 percent, based on at least a broker price opinion, two months' reserves is acceptable.

When current properties are being converted to investor properties, Fannie said it will consider 75 percent of income from fully executed rental agreements if the LTV is no more than 70 percent and the security deposit has been deposited into the borrower's account.

When the LTV is above 70 percent, however, both payments must be used in DTI qualifications and six months' reserves are required for both properties.

The updated policies are effective on loans with applications dated after Aug. 1.

When loans are sold to Fannie more than six months after the loan closed, the lender must warrant that the current property value is not less than the original value. The is effective for up to 12 months after the loan closing. This update is effective for whole loan purchases dated Aug 1 or mortgage-backed securities issued on or after Aug. 1.

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