Thursday, March 13, 2008

Fannie Mae Establishes New Conforming Loan Guidelines

Today, Fannie Mae released long-awaited guidelines on the new "jumbo-conforming" loans resulting from the Economic Stimulus package passed by Congress last month. This is a "wiki" version of these guidelines.

There is lots of good news – with a few strings attached:

The good news:

- The conforming loan limit is increased to $729,750 (from $417,000) for purchases of single family homes and condos in Los Angeles County
- Maximum purchase price of $802,725 with 10% down; $875,700 with 20% down, etc.
- Fannie Mae recommended a premium for "jumbo-conforming" loans (vs. traditional conforming loans) of only .25% for fixed loans and .75% for adjustable rate mortgages.
- The conforming increase will apply to all residential property (1- to 4-units), not just owner-occupied single family homes, as some feared
- Up to 90% LTV (loan-to-value ratio, or mortgage amount/property value) is allowed with credit scores over 700; with a credit score of 660 – 700, buyers must have a LTV of 80% or less (= 20% downpayment or more)

The strings attached:

- Full documentation is required for all loans (i.e., buyers cannot use “stated” income)
- Investment properties max out at 60% LTV
- No “cash out” financing is permitted, not even to pay off second loans, to combine loans, etc. (When an owner refinances a mortgage at a higher amount than the current loan balance, it is referred to as a "cash out refinance.") Cash out financing is only allowed to pay closing costs + $2,000
- No 7/1 or 10/1 programs are allowed as of now. 5/1 interest only programs are allowed, as are fully-amortized 5/1 programs (i.e., interest plus principal) and fixed-rate programs.
-We still do not know how lending institutions will react to Fannie Mae’s guidelines. They will likely follow them fairly closely.

Fannie Mae will start buying these loans starting April 1st.

The bottom line for buyers is lower interest rates, lower downpayment requirements and increased purchasing power.