Fannie Mae tightens lending rules

Fannie Mae, the giant mortgage finance company that helps shape lending guidelines, plans next month to raise minimum credit score requirements and limit the amount of overall debt that borrowers can carry relative to their incomes.

The changes are the latest in a series of crackdowns by the mortgage industry and could surprise some prospective home buyers.

The industry is tightening loose lending standards that led to the mortgage meltdown and the subsequent economic crisis. But the fear is that if the industry becomes too restrictive, it will freeze out too many borrowers and impede an economic recovery.

Already, lending by U.S. banks plunged by 2.8% in the third quarter, the largest drop since at least 1984, according to federal data released this week.

Some of that retrenchment is fostered by Washington-based Fannie Mae and McLean, Va.-based Freddie Mac, which don’t buy loans that do not meet their rules, meaning lenders have to abide by their guidelines or else lose a key source of financing.

Starting Dec. 12, the automated system that Fannie Mae uses to approve loans will reject borrowers who have at least a 20% down payment but whose credit scores fall below 620 out of 850. Previously, the cutoff was 580.

Also, for borrowers with a 20% down payment, no more than 45% of their gross monthly income can go toward paying debts.

Fannie declined to disclose the previous threshold, except to say that it was higher. The company will raise the level to 50% in cases with “strong compensating factors.”

Brian Faith, a Fannie Mae spokesman, said these limits reflect the company’s recent experience. Loans to people with credit scores below 620 fell seriously behind at a rate approximately nine times higher than other loans purchased in the same period, Faith said.

Loans taken out by borrowers with lots of debt also suffer higher levels of serious delinquency, he said.

“It’s not enough to help borrowers buy a home -- we must also ensure that they can stay in the home over the long term,” Faith said in a statement.

Several lenders have imposed tougher restrictions on their own. Others have changed their rules in anticipation of the new guidelines.

And several said the new rules were not necessarily a bad idea. “But you will have people get caught up in the net,” said Bob Walters, chief economist at Quicken Loans, an online lender.

ElBoghdady writes for the Washington Post.