Loan Requirements Toughened for First-Time Home Buyers

The nation’s main wholesale dealer in home mortgages announced changes today that will make it more difficult for first-time home buyers to qualify for conventional loans.

David O. Maxwell, chairman of the Federal National Mortgage Assn., said the revised standards for loans Fannie Mae will purchase are aimed mostly at mortgages for which the buyer puts up less than 10% as a down payment.

It is foreclosed loans in that category that have caused serious losses for the private mortgage underwriting firm, Maxwell said.

He said the stricter standards being imposed Oct. 1 on mortgages qualifying for Fannie Mae repurchase are necessary because the kind of housing inflation of the 1970s that made almost any home loan a profitable one is no longer present in the market.

With house values generally rising no more than inflation--and in some cases at a slower rate--a home owner strapped to make payments cannot rely on a sharply higher home value to enable him to sell without taking a loss.

As a result, Maxwell said, many owners simply “walk away” from the loan, leaving private insurers and mortgage lenders to absorb the loss.

The major change announced today increases the required amount of income a borrower needs to qualify for mortgage loans with down payments of less than 10%.

Under the new standard, a borrower’s monthly housing expenses will not be allowed to exceed 25% of gross monthly income, and housing expenses plus installment debt cannot exceed 33%.

Although Fannie Mae makes no loans directly to individual home buyers, its loan guidelines typically are viewed by mortgage lenders as an industry standard because it is the nation’s largest single supplier of mortgage credit.