Mortgage Underwriting Becomes Stricter: What are your Options?

While the government has done a reasonable job of facilitating the housing market and keeping mortgage rates low, the same can’t be said about the underwriters, namely Fannie Mae and Freddie Mac. Both organizations are tightening standards, not in spite of but because of the housing crisis. Few can blame them; after all, it was their laxness that only facilitated the crisis, but also necessitated large-scale government bailouts.

Specifically, both Fannie and Freddie have tweaked their rules regarding the treatment of so-called trailing spouses, a term which refers to “one who joins his or her spouse or partner in a job-related move but who has yet to obtain employment in the new location.” Previously, at least part of this income could be used to satisfy the ratios that lenders calculate when writing mortgages.

Under the new rules, Fannie won’t allow any of this income to be applied. Freddie, meanwhile. will continue to allow trailing spouses to apply their income, under the conditions that they have been continuously employed for the last two years at the same job, that the money wasn’t earned from self-employment. Also, income from a trailing spouse cannot exceed 33% of qualifying income.

In addition, stocks and bonds will now be discounted by 30% in the calculation of certain ratios and when used to meet net asset tests. “For retirement accounts, it [Fannie Mae] will count only 60 percent of the value toward reserves.” Previously, no discount was applied. Given both the economic downturn and the accompanying collapse in securities prices, these rule changes are understandable. With steady employment more difficult to come by, and with stocks and bonds worth a fraction of their bubble values, more conservative rules were probably inevitable.

While these rules cannot be circumvented, they can still be skirted. For those of you who otherwise would have sought to use the income from a trailing spouse, you can still claim their income, but won’t be able to officially verify it. The same goes for assets. If you are confident that a certain mortgage is ultimately affordable regardless of what the lender (via the underwriter) is telling you, it’s still possible to take out such a mortgage. Since your assets and/or income can’t ultimately be verified, however, you may have to suffer a higher interest rate. At the same time, these standards not only exist to protect the underwriter, they also exist to protect you from overextending yourself. In short, think long and hard before going ahead when the lender tells you no.