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Fannie Mae and Freddie Mac are making the following changes to interest-only and 3/1 and 5/1 ARM Loan Programs. These changes go into effect immediately.
Interest Only Product Changes
Interest only transactions are no longer available for Cash-out refinances, Investment properties and 2 to 4 unit properties.
Interest only loans are still eligible on following transactions:
– unit purchase and rate/term transactions
– Primary residences or second homes with a:
– Maximum LTV and CLTV of 70%
– Minimum credit score of 720
– The borrower must have minimum reserves of 24 months
3/1 and 5/1 ARM Qualification Changes
Fannie Mae is changing the qualifying rate for 3/1 and 5/1 Arms to limit the impact of potential payment shock for ARM borrowers. The borrower’s now must qualify using the greater of the note rate plus 2%, or the fully indexed rate. Lets understand this using an example:
Say you are buying a $500,000 single family house with 20% down payment and your start rate on a 5/1 ARM is 4%. Per earlier guidelines, you could have qualified for this loan with an income of $5800/month assuming you had no other debts. But with the new guideline, you need to qualify at 6% (start rate +2%). So now the income that you need to qualify for the same loan would be $6900/month. Thats a jump of $1100/month or ~19%.
As you can see from the example above, qualifying for ARM loans is going to be more difficult moving forward. If you would like to understand what loan program is more suitable for your situation, contact me for a complimentary consultation or fill out our rate quote form.