Mortgage Standards Tighten Again

Fannie Mae is getting tougher on mortgage lending standards again. What will this mean for the housing market and will it ever get better?

Fannie Mae just announced it is tightening up qualification criteria even further including:

  • Lowering loan-to-values
  • Requiring more income documentation
  • Increasing minimum credit score requirements
  • Setting concrete guidelines for debt-to-income ratios
  • Reducing underwriting flexibility
  • Limiting loan options for those with limited credit histories
  • Eliminating room for compensating factors to be used to approve those who don’t fit the exact mold

If this wasn’t bad enough, individual mortgage originators who sell their loans to Fannie Mae have always traditionally set their standards even higher, meaning home loans are about to become a lot tougher to get.

On top of this loan costs have been rising, along with related home owner expenses including association dues and assessments, utilities and for those in states like Florida property insurance hikes of 30% or more.

This will clearly make it a much tougher real estate market out there than most would like to see. That doesn’t mean the recovery won’t continue as other factors will continue to push it forward, although it does mean the window between now and October when these new mortgage rules going into effect offers the best time for home buyers to buy and get the best financing deals and means that homeowners may have to stop counting on their equity returning overnight and actually list and sell right now in order to receive the maximum price.

On the bright side history tells us that mortgage standards will loosen again. Credit score and documentation requirements will drop and new loan programs will be developed. Unfortunately that could be 10 years from now. That isn’t a problem if you are buying a long term residence or rental home now or even finding discounted properties and flipping them but it does mean the pressure is on sellers to act fast.