The Federal National Mortgage Association, affectionately called Fannie Mae, has recently announced that it will become stricter on the requirements for adjustable rate mortgages (ARMs) and interest-only loans that it will support. The new rules will take effect on August 31, 2010.
Here are some of the details of Fannie Mae’s new guidelines.
- Fannie Mae will only assist adjustable rate mortgages if the homebuyers will be able to prove that they can make good on the monthly payments even if the payments go up by two interest percentage points from the original rate, or if the payments rise to the maximum allowed interest rate, whichever is higher. Put bluntly, if the beginning rate is 5% and the upper limit is 7%, the homebuyer must prove he or she can afford 7% interest rates. And if the upper limit hits 8%, then the borrower should be able to afford that.
- For Fannie Mae-backed interest-only mortgages, homebuyers will now be required to pay at least 30% of the house price as downpayment.
- Homebuyers applying for interest-only loans should have credit scores of at least 720, and have enough savings to ensure mortgage payments and housing costs for two years.
No more balloons
Fannie Mae will also stop supporting balloon mortgages, where mortgage payments start with lower-than-average interest rates, with a large corrective payment to be given at a specified date.
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