Fannie Mae to Tighten Up Credit Criteria for Borrowers
By: Gerri L. Elder
The nationwide credit crunch will now affect even more people looking for mortgage loans. Federal National Mortgage Association (Fannie Mae) has recently notified lenders that it will be raising the standards for mortgage loans and will no longer purchase loans issued to consumers who do not meet minimum credit criteria. Fannie Mae has decided that is it time to tighten up in order to slightly insulate itself against the foreclosure crisis.
Fannie Mae, the largest home funding company in the United States, and rival Freddie Mac have been under pressure from lawmakers to buy more home loans in order to force mortgage rates down and help the housing market. However, the companies are dealing with their own issues as they deal with the increased default rates on mortgage loans and have been reluctant to fold under the pressure.
Because of the huge number of homeowners who have defaulted on their mortgage loans, Fannie Mae and Freddie Mac are being more restrictive about the loans that they purchase and also raising their fees as they attempt to raise capital. Fannie Mae has amended its underwriting practices for loans that it buys. According to a report by Reuters, a company spokesperson has said that Fannie Mae will adjust prices to reflect the increased risk in the housing market and to protect the company's capital.
Some of the changes that Fannie Mae has made include the requirement of minimum credit scores for borrowers, the requirement of five years established credit after a foreclosure and a longer period of reduced payment plans for homeowners who are struggling to avoid foreclosure.
Fannie Mae says that in some circumstances it will acquire loans made to borrowers with credit scores lower than 580, but in general they will expect borrowers to have a minimum credit score of 580 in order for them to purchase the loan.
Most borrowers who have been through foreclosure will now need to re-establish their credit for five years before being approved for a mortgage loan rather than the four years that Fannie Mae previously required. The company says that shorter recovery periods will be allowed if the borrower has "documented extenuating circumstances" that led to the previous foreclosure.
Going forward, Fannie Mae will allow borrowers to temporarily suspend or make partial payments on their mortgage loans for up to six months. Previously they only allowed the leeway in payments for periods of up to four months. The company hopes that being more flexible with homeowners will help many avoid foreclosures which are costly to the company and deplete capital.