Recently, Fannie Mae announced the implementation of its new “Home Ready” mortgage product.
According to Fannie Mae, this mortgage product was designed to support homeownership opportunities among underserved populations. They now recognize the growth of extended-household living arrangements and by allow the existence of non-borrower income to be considered as a compensating factor in Desktop Underwriter.
Articles are already being published proclaiming that Fannie Mae is returning to the same lax underwriting policies that helped contribute to the financial crisis in 2008.
The focus of these articles is the policy of allowing non-borrower income to be considered when qualifying the Home Ready borrower.
Although this is quite a radical change in credit underwriting policy, let’s take a look at some of the safeguards established by Fannie Mae in the processing and underwriting of Home Ready loan transactions.
Fannie Mae’s Home Ready program will now recognize those households in which a member, other than the mortgage holder or spouse, has documented income. If such income from a non-borrower is equal to or at least 30% of that of the borrower(s) – it would be considered as a compensating factor. Non-borrower income is not considered as effective income in qualifying the borrower(s).
Home Ready mortgages will permit the borrower(s) to have a debt-to-income higher than 45% – up to as high as 50% with this additional non-borrower income. This comes with the understanding that this non-borrower income would be available to provide additional assistance with recurring expenses if needed.
These non-borrower household members may be relatives or non-relatives. Typically, they would include adult children, parents, relatives, non-relatives (friends).
Obviously, the income derived from the non-borrower must be documented and the non-borrower must sign a statement of intent to reside with the borrower(s) for a minimum of 12 months.
A comprehensive homeownership education on-line course must also be completed by the borrower(s) (which includes a final test) and borrowers will also have access to post-purchase advisory services.
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In my opinion, Fannie Mae should be commended for rolling out this new mortgage product which will, no doubt, enhance homeownership opportunities for underserved but creditworthy borrowers.
That being said, I would expect Fannie Mae to closely monitor any early payment defaults involving these loan transactions and to identify the cause(s) of such defaults.
Perhaps, future modifications will need to be taken by Fannie Mae (such as limiting non-borrower income to only relatives) in order to reduce potential defaults going forward.
Stay tuned!