Until the recent past, your regular payments did not play any role in your ability to qualify for a home mortgage. Fortunately, that has changed owing to a recent announcement by the Federal Housing Finance Agency (FHFA). Now, Fannie Mae will require that lenders consider borrowers’ rent payment histories during the underwriting process.
Fannie Mae implemented an update to Desktop Underwriter (DU) – an automated underwriting system that helps mortgage providers make informed lending decisions on government and conventional loans – during the third weekend of September 2021. All the changes are meant to apply to case files that are submitted or resubmitted after this update.
An important change owing to this update is that positive rent payment history has been added to DU’s risk assessment.
If your existing monthly rent is $300 or more, and if a mortgage provider obtains a 12-month Verification of Asset (VOA) report, DU will aim to highlight regular rent payments within the report so they may be used in your risk assessment. The new risk assessment system will apply to your case file if you meet these criteria:
In case DU identifies a rent payment pattern in your bank account data, it will use the information to aid in your credit risk assessment. To make sure that DU identifies your rent payments, your mortgage provider needs to:
According to Fannie Mae, it has implemented this change in credit risk assessment with the aim of improving borrowers’ homeownership odds. Until now, limited credit history has worked as a barrier for many probable homeowners even if they’ve maintained an excellent rent payment history. While rent reporting through different reporting programs can help improve credit scores, not many landlords report rent payments to credit bureaus. Consequently, renters see no positive effect of their regular rent payments on their credit scores. With the new change, this should no longer be a problem as DU will attempt to detect rent payment histories through applicants’ bank accounts.
As a first-time homebuyer, it is important to understand how the mortgage underwriting process works, as it gives you means to improve your odds for approval. The underwriting process begins only after you’ve narrowed down on a house, a lender, and a mortgage. It requires that you agree to the loan estimate provided by your lender and is indicative of your intent to proceed.
The main aim of mortgage underwriting is to ensure that a borrower and the property in question meet the loan’s requirements. While an underwriter might approve or deny your application, you might also receive a suspended verdict that comes with further requirements for reactivation.
Even though you might have gone through a preapproval process that entails a preliminary credit check, an underwriter is tasked with carrying out an in-depth credit check and quoting an interest rate. During this stage, you need to provide different types of financial documentation. For instance, while paystubs help confirm your income, bank statements offer insight into your existing financial condition and help determine if you have adequate funds to cover for your loan’s closing costs.
Depending on the requirements of your application for credit, an underwriter may follow different measures. These include:
Depending on the mortgage provider you select, the underwriter responsible for assessing your application might choose to proceed manually or use an automated underwriting program. While automated underwriting is typically faster, it comes with some limitations. For example, using automated underwriting software might not be the best idea when assessing applications of people who have inconsistent incomes. In some instances, underwriters gauge risk by using a combination of manual and automated underwriting.
Depending on how streamlined a lender’s underwriting process is, how busy a lender is, and whether or not the underwriter handling your case file requires additional information, the process might take anywhere from a few days to a few weeks. Typically, you may expect a loan application to close completely in around 30 to 50 days. How long it takes to close a loan application may well be a standard for selecting a lender.
At the end of the underwriting process, you may receive one of the following decisions:
While different aspects require your attention when buying a home, getting a suitable mortgage remains among the most important. As a first-time homebuyer who’s looking for a mortgage, it is crucial that you abide by these tips.
The first step of getting a mortgage is determining how much you can afford. This involves accounting for your income, assets, expenses, debt, the desired location, and your creditworthiness. You also need to consider the down payment, closing costs, and relocation expenses. While conventional wisdom suggests that you put 20% of a home’s selling price toward the down payment, requirements vary for different types of mortgages. For instance, some government-backed mortgages require no down payment at all.
Check your creditworthiness by going through your credit reports. You get access to free copies from the top three credit bureaus in the country – TransUnion, Experian, and Equifax. If you find any errors, contact the credit bureaus in question to get them fixed, as they might have an adverse effect on your credit score.
If you don’t have good or excellent credit, work on strengthening it by following different measures. These include making all your repayments on time, bringing down your credit utilization ratio, and limiting how often you apply for new forms of credit.
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First-time homebuyers have the option of applying for conventional mortgages. However, they might qualify for other types of mortgages based on different eligibility criteria.
Narrow down on the top mortgage providers based on the type of loan you wish to get. Then, look at more than just the interest rates on offer. Other aspects that need your attention include different fees you might need to pay, flexibility in the loan’s terms, as well as the level of customer service the lender provides.
A prequalification involves an informal evaluation of your finances and comes with an estimate amount that a lender is willing to provide. A preapproval, on the other hand, requires delving deeper into your financial information and looks at your credit score, bank statements, and W-2s. As a result, this step gives you a more accurate number surrounding how much money you qualify to borrow.
Since getting preapproved gives you a clear indication of how much money you may borrow, you get to look for homes accordingly. A preapproval letter also works well in the eyes of real estate agents and sellers, as they know you’re serious about the process. Besides, once you have a preapproval in place, you minimize the possibility of getting nasty mortgage-related surprises down the down.
Here are some common home buying mistakes you need to avoid:
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The recent update to DU implemented by Fannie Mae serves as great news for a number of renters who are hoping to become homeowners – given that their regular rent payments will now play a role in their credit risk assessment. However, if you wish to buy a home in the near future, it is crucial that you start getting your finances and creditworthiness in order because these play important roles in the underwriting process.
Given that there is more to buying a house than getting a mortgage, going through Meadowbrook Financial Mortgage Bankers’ First Time Homebuyer’s Guide might be worth your while.
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Considering homeownership but not sure where to begin? The Meadowbrook Financial Mortgage Bankers Corp. guide to home buying will make the process easy all in one packet.
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