2 Largest Underwriters Will Lend to Applicants With Credit ‘Dings’

The top underwriters of the two largest providers of mortgage money in the country have an urgent message for anyone shopping for a home loan this summer: Despite what you may hear from local loan officers, Fannie Mae and Freddie Mac do not require spotless, squeaky-clean credit histories from borrowers.

Nor do they insist that mortgage applicants fit into unbreakable cookie-cutter molds on income-to-debt ratios, down payment sources, employment histories or appraisal standards.

In separate interviews, Robert J. Engelstad of Fannie Mae and John Hemschoot of Freddie Mac reacted to reports that applicants with even small dings in their credit histories are being rejected or steered to higher-rate, “nonconforming” loan sources.

Nonconforming in home mortgage lingo means that the loan doesn’t meet Fannie Mae’s or Freddie Mac’s investment criteria. Fannie (the Federal National Mortgage Assn.) and Freddie (the Federal Home Loan Mortgage Corp.) buy billions of dollars of loans originated by local mortgage companies and banks every month.

Credit standards have become a key issue in the booming home mortgage industry recently because the recession years have left many families with less-than-perfect repayment histories on their charge accounts, credit cards, auto loans and home mortgages. When such borrowers contact local lenders for a new home loan or to refinance, they may be told that they no longer meet Fannie Mae’s or Freddie Mac’s strict underwriting standards.

But that’s not necessarily the case at all, say Engelstad and Hemschoot.

“There are perceptions out there (about what the two agencies will or will not accept),” Hemschoot said, “that simply have no basis in fact.” For example, some loan officers cite specific numerical standards for late payments on charge accounts that disqualify applicants. Yet Freddie Mac’s loan guidelines contain no numerical standards whatsoever on frequencies or durations of loan delinquencies.

Fannie Mae’s printed guidelines do set numerical tests, but they are far more liberal than loan officers may be aware. As long as your credit investigation turns up no major problems, such as previously undisclosed bankruptcies, court judgments or foreclosures, you can have the following sets of dents and dings over the past 12 months and still qualify:

--Up to two payments 30 days past due on your revolving credit accounts (cards, department stores, etc.), but none over 60 days. In the mortgage trade that means “2 by 30” is OK.

--Up to one payment 30 days late on your installment credit accounts (car loans and other personal debts with fixed payment schedules). In other words, “1 by 30” is OK.

With dings like these, however, Fannie probably doesn’t want to fund you if you’ve also been 30 days late on your rent or your current mortgage without a good reason.

Fannie’s guide defines its overall credit analysis approach this way: “Generally, a history that consists of a minor, isolated instance of poor credit or a late payment is acceptable--as long as the lapse is satisfactorily explained and the borrower has other credit accounts that have excellent payment records.”

Other application-related areas that Freddie and Fannie find frequently misunderstood:

--Income ratio ceilings. The standard requirement for conforming loans is that a borrower’s housing expense be no greater than 28% of income, and total debt payment no greater than 36% of income. But both Fannie and Freddie commonly allow exceptions to these rules. Freddie, for instance, permits higher ratios on energy-efficient properties, and on contributions to monthly household income by members of “extended families” who live in the home but are not co-owners of the property. Fannie extends its ratios via community lending programs targeted at moderate-income families.

--Property and appraisal characteristics. Freddie Mac’s Hemschoot noted the “myth” that homes with “fair or poor” appraisal ratings, or that are located in a neighborhood near a convenience store, office building or gas station, cannot qualify for conforming loans. To the contrary, he said, Freddie Mac doesn’t reject properties like these. As long as the neighborhood has a “viable market for housing” or is undergoing revitalization, Freddie Mac will evaluate the loan just as any other.

--Lack of credit history. First-time applicants with no credit cards or charge accounts often believe--or are told--that they can’t qualify for a conforming loan at prevailing low rates. “Wrong!” says Hemschoot. As long as an applicant can demonstrate over a two-year period his or her ability to make regular, “non-credit” payments for items such as utilities, rent, insurance, medical bills or union dues--and the monthly total equals the proposed payments on the mortgage--the applicants can qualify for a loan.

But what do you do if you know you pass Freddie and Fannie’s underwriting tests, but the loan officer tells you point-blank that you don’t?

Engelstad puts it succinctly: Either tell the loan officer to pull Fannie or Freddie’s guide off the shelf and read it. Or hit the road. Shop around for a mortgage firm that knows the rules and wants your business.