By Dina ElBoghdady
Washington Post Staff Writer
Wednesday, November 25, 2009 4:53 PM
Fannie Mae, the giant mortgage finance company that helps shape lending guidelines, plans next month to raise minimum credit score requirements and limit the amount of overall debt borrowers can carry relative to their incomes.
The changes are the latest in a series of crackdowns by the mortgage industry and could some surprise some prospective home buyers. The industry is rolling back loose lending standards that led to the mortgage meltdown and the subsequent economic crisis. But the fear is that if the industry becomes too restrictive, it will freeze out too many borrowers and impede an economic recovery.
Already, lending by U.S. banks plunged by 2.8 percent in the third quarter, the largest drop since at least 1984, according to federal data released this week. Some of that retrenchment is fostered by District-based Fannie Mae and McLean-based Freddie Mac, which refuse to buy loans that do not meet their rules, meaning lenders have to abide by their guidelines or else lose a key source of financing.
Starting Dec. 12, the automated system that Fannie Mae uses to approve loans will reject borrowers who have at least a 20 percent down payment but whose credit scores fall below 620 out of 850. Previously, the cut-off was 580.
Also, for borrowers with a 20 percent down payment, no more than 45 percent of a their gross monthly income can go toward paying debts. Fannie declined to disclose the previous threshold, except to say that it was higher. The company will raise the level to 50 percent in cases with "strong compensating factors."
Brian Faith, a Fannie Mae spokesman, said these limits reflect the company's recent experience. Loans to people with credit scores below 620 fell seriously behind at a rate approximately nine times higher than other loans purchased in the same period, Faith said. Loans taken out by borrowers with lots of debt also suffer higher levels of serious delinquency, he said.
"It's not enough to help borrowers buy a home -- we must also ensure that they can stay in the home over the long term," Faith said in a statement.
Several lenders have imposed tougher restrictions on their own. Others have changed their rules in anticipation of the new guidelines. And several said the new rules are not necessarily a bad idea.
"But you will have people get caught up in the net," said Bob Walters, chief economist at Quicken Loans, an online lender. "When you look at all the people layering in different guidelines, they're all putting down a patchwork of rules and the net effect is that the universe of people able to get loans is getting smaller."
Jennifer Du Plessis of George Mason Mortgage, a direct lender that sells loans to other banks as well as Fannie and Freddie, said that at least one bank she knows of started imposing the 45 percent debt limit within the past few weeks while others have set that limit at 50 percent.
"It is going to limit people's ability to qualify for a loan, absolutely," Du Plessis said. "We've seen it on a few of our loans, where they had to get more money down or buy a lesser house."
Emily McCombie, a recent college graduate with good credit and enough saved for a decent down payment, was pre-approved for a $200,000 loan when she moved to Loudoun County from Pennsylvania in August.
McCombie, a teacher, started shopping for a townhouse immediately. But when it came time to buy, she was surprised to learn that her salary and her debts, mostly school loans, did not meet new debt-to-income requirements imposed by her lender. She was only able to secure $185,000.
"It was a big drop for me," McCombie said. "I did find a condo, luckily, and I bought it. But I felt like I had wasted so much time looking at a price range I couldn't afford."