New credit report rules require 30 months of payment history
South Bend, IN · Member since 2014 · 318 posts · 156 votes
New credit report rules require 30 months of payment history
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Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
10yThe trended data thing, like many things in life, isn't nearly as big of a deal as it's being made out to be in some circles. And let's recall that Fannie Mae doesn't have a monopoly on the secondary market, "fine, let's just do a Freddie Mac loan" is a very common solution (for those of us that do both).
Hell, there are times where I'm doing the "let's do Freddie" solution that people don't even realize I'm doing it. Most common example: Every single conventional 80% LTV 3-4 unit property loan I do for an owner occupant - all Freddie Mac, because Fannie wants 75% LTV in that scenario.
There will be times that someone who barely uses credit, but pays it off in full any month when they do, but also has a modest FICO because of the lack of credit usage and lack of paying interest (SURPRISE! FICO indirectly rewards paying interest. Credit card companies are FICO's #1 clients), that can qualify now that could not previously qualify.
There will be times where the trended data is a deal-breaker for Fannie, and for some reason they can't go Freddie, but these will be rare.
I sincerely doubt it will ever impact a deal where our FICOs are north of 700.
Interest rate pricing differences between Freddie and Fannie are very trivial (or people would notice reeeeeallly quickly when I did my "switch it to Freddie" solution, right?). It will not amount to 0.25% to rate, more like 0.25% to discount points.
24 Replies
- Professional · Mansfield, TX · Member since 2013 · 77 posts · 44 votes10y
Good info to know. Thanks @Account Closed
I will not worry much since I pay off my credit cards every month, regardless of the amount.
Cheers!
- South Bend, IN · Member since 2014 · 318 posts · 156 votes10y
You are welcome.
According to this article by Barbara O’Neill, Ph.D., CFP®, Rutgers Cooperative Extension, at Rutgers University which she wrote on 9/30/2015 here: http://bit.ly/2cY7i5E
- Approx 45% of American credit card users pay their credit card bill in full every month
- 55% of American credit card users carry a balance on their cards
- 11% of those that carry a balance only make the minimum payment
Going by the data in the article it just became harder for around 55% of mortgage applicants to qualify for a mortgage.
- Professional · Mansfield, TX · Member since 2013 · 77 posts · 44 votes10y
Actually this is good for savvy investors, those that are fiscally conservative. With today's credit card (cc) interest rates, cc's are worse than a Hard Money Loans.
Since part of my strategy is Owner Finance, this plays well into my strategy. This new lender review policy just expanded my market!
- South Bend, IN · Member since 2014 · 318 posts · 156 votes10y
That is exactly what I thought too when I read the story.
It makes it tough for flippers but creates opportunity for those with an Owner Financing/Lease Option strategy.
I would like to hear the thoughts of @Brian Gibbons on this.
- South Bend, IN · Member since 2014 · 318 posts · 156 votes10y
@Account Closed
It is a Fannie Mae requirement for all lenders that partner with them.
- Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes10y
The trended data thing, like many things in life, isn't nearly as big of a deal as it's being made out to be in some circles. And let's recall that Fannie Mae doesn't have a monopoly on the secondary market, "fine, let's just do a Freddie Mac loan" is a very common solution (for those of us that do both).
Hell, there are times where I'm doing the "let's do Freddie" solution that people don't even realize I'm doing it. Most common example: Every single conventional 80% LTV 3-4 unit property loan I do for an owner occupant - all Freddie Mac, because Fannie wants 75% LTV in that scenario.
There will be times that someone who barely uses credit, but pays it off in full any month when they do, but also has a modest FICO because of the lack of credit usage and lack of paying interest (SURPRISE! FICO indirectly rewards paying interest. Credit card companies are FICO's #1 clients), that can qualify now that could not previously qualify.
There will be times where the trended data is a deal-breaker for Fannie, and for some reason they can't go Freddie, but these will be rare.
I sincerely doubt it will ever impact a deal where our FICOs are north of 700.
Interest rate pricing differences between Freddie and Fannie are very trivial (or people would notice reeeeeallly quickly when I did my "switch it to Freddie" solution, right?). It will not amount to 0.25% to rate, more like 0.25% to discount points.
- Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes10y
Another note, the most common guideline change that people want BY FAR is for us to be able to exclude "oh but I pay it off every month" credit cards from DTI ("oh but I pay it off every month" is a phrase I hear several times a week because I actually show my math and where my numbers are coming from to consumers... no good deed goes unpunished, right?).
I have no idea what future guideline changes will bring, but now there is the technological ability to actually exclude those debts, should it ever be decided by the powers that be that this would be a good idea, because the trended data is right there on the credit report (actually started appearing, in my office, a few months ago).
- South Bend, IN · Member since 2014 · 318 posts · 156 votes10y
Thanks for the clarification. I am not a mortgage professional so I appreciate your insights and the link.
Is Freddie Mac going to follow suit as well and start using trended data as well?
Are Fannie and Freddie requirements vastly different or they pretty much mirror each other with slight differences?
- Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes10y
Hi @Account Closed,
I have no idea what Freddie will do.
The two tend to be a little bit symbiotic in that Freddie fills Fannie gaps (wow that came out dirty...), and vice versa. They compete with each other for the exact same pool of borrowers, so it's not probable that they will ever be wildly different (as essentially identical products), nor is it probable they will ever be exactly identical (due to competitive forces).
Probably about 20% of the loans I do are coded "Fannie Only" or "Freddie Only" -- the rest are 100% conforming with both sets of guidelines, so we just sell to whoever offers the most money (which often times is neither Fannie or Freddie).
- Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes10y
Originally posted by @Eddie T.:
Chris Mason can you speak more to the point on how it is viewed negatively when we pay our credit card bill in full every month.
It's not. That's a good thing. Keep it up.
Carrying credit card balances month-to-month is a waste of money. You probably purchased deodorant with that credit, among other things. A stick of deodorant is a depreciating asset. You shouldn't finance depreciating assets.
- South Bend, IN · Member since 2014 · 318 posts · 156 votes10y
I wanted to get the thoughts of @Brian Gibbons on trending credit data since he is very prolific on creative financing and as @Duane Kidman mentioned, it will play well into Owner Finance since it will become difficult for more people to qualify for a mortgage.
I would also like to hear the thoughts of @Jay Hinrichs since as a HML lending to flippers, if the buyer pool shrinks due to trending credit data requirements, houses may stay longer on the market possibly leading to defaults by the flippers.
- 10yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Account Closed I suppose it depends on the price points your hitting for your resales.
entry level I can see that especially with those trying to get back into the game after flame outs in 08 to 2011.
my stuff that we do that is move up etc... most borrowers go convential and even pay cash so I don't see to much of an issue.. I see the issue more in the lower end border line credit folks.
- South Bend, IN · Member since 2014 · 318 posts · 156 votes10y
I see, so this will not affect HMLs like you that primarily deal in move-up higher price points.
For the market segment in the entry level where this may be a problem.....smaller HMLs or private individuals lending from their IRA to flippers.....how do you see this shaking out?
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes10y
Glad to see that my students are recognized as prolific in areas of seller financing :)
Those who finance living expenses are the best candidates for future bankruptcies. I don't think Chris meant to say financing depreciating assets is a bad thing, most everyone has a car payment.
Paying off credit card debt is a good thing, but if you use the card the average balance will still be used in your ratio analysis because they know you'll continue using the cards.
As to seller financing, you're still looking at the ability to pay, which will include credit standings be met for any future take out loan, you're not avoiding much and I doubt the pool of applicants will increase because of Freddie, USDA, FHA and VA.
The past mortgage history is still the most important indicator, over revolving debt and installment debts, to a mortgage lender.
Remember too, as enticing as it might be to grab some money from a buyer and finance them, not everyone is capable of buying a home, nor should everyone own a home. Many tenants need to be tenants and underwriting a seller financed deal is actually tougher than a conventional loan due to the leeway of the lender and especially with flawed borrowers. Conventional loans is about meeting the guidelines, seller financing is more about determining if the borrower can reasonably meet the guidelines in the future which is a whole different game. :)
- 10yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Account Closed stands to reason its going to curtail some folks from buying and or delay there buying until they meet this standard
- South Bend, IN · Member since 2014 · 318 posts · 156 votes10y
Speaking of Freddie, is it true that Freddie buys primarily from Savings & Loans while Fannie buys primarily from Banks?
- South Bend, IN · Member since 2014 · 318 posts · 156 votes10y
@Bill Gulley ....and my sincere apologies for paying homage to the student without mentioning the teacher :)
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes10y
Originally posted by @Account Closed:
Speaking of Freddie, is it true that Freddie buys primarily from Savings & Loans while Fannie buys primarily from Banks?
Yes, originally Freddie primarily did S&Ls but they worked with all institutional lenders. The idea was to provide S&Ls with funds availability through the Federal Home Loan Bank Board which has since been abolished and placed under HUD for oversight.
If interested you can look up the history of US banking, the formation of State Banks, National Banks, (commercial banking) S&Ls and Credit Unions along with co-op depositories. You'll then see the formation of FDIC and FSLIC and regulatory differences the secondary mortgage market system of mortgage backed securities. We "have" 3 Fannie Mae, Ginnie Mae that spun off of Fannie and Freddie Mac. The differences are based in their Charters and the government backing of the Mortgage Back Securities in the Secondary Market. They may all deal with insured depository or mortgage origination institutions. I don't know who has the biggest slice of the old S&Ls as most changed to State Banking Charters. I was active in the business with the demise of the S&L crisis.
The current system is still under review with HUD at the wheel after 2008.
And that's okay, LOL :)
- South Bend, IN · Member since 2014 · 318 posts · 156 votes10y
Thanks for the informative response!
- South Bend, IN · Member since 2014 · 318 posts · 156 votes10y
Thanks for your earlier response. I meant how do you see this shaking out for HMLs that deal in the entry level where this may be a problem as this plays out?
Raising the bar on the criteria they lend on which will make it harder for flippers to qualify or maybe since they do not want to be in the business of taking back flips that won't sell maybe coming up with some sort of new program as a back-up that offers financing to the flipper and financing to the buyer but both HML and flipper share the spreads until the buyer can qualify from a bank? A hybrid of a construction to perm with three parties - HML, flipper and end buyer?
- Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes10y
Originally posted by @Bill Gulley:
. I don't think Chris meant to say financing depreciating assets is a bad thing, most everyone has a car payment.
This is something that I am certain many here will have to agree to disagree with me on, but I actually meant exactly that: don't finance depreciating assets, including cars. You will know when you can afford a $30k new car when you have $30k in your checking account. :)
That is of course my humble opinion. In my office of debt-peddlers, none of us have car payments, none of us carry credit card balances, but some of us drive some pretty crappy cars. We all have mortgages.
An exception is of course folks in outside sales, which will include many posters here. If that financed BMW adds to your bottom line, it's not a depreciating asset like most cars are, because it is in fact yielding cashflow. If you sum up monthly interest and monthly depreciation of the vehicle, and that yields a number smaller than what you believe you earn in a month because you are driving that car, you're coming out ahead. Same with financed work trucks for the DIY fix-n-flippers or DIY BRRRRrrrrr folks. Financially, that leased or financed vehicle is solid.
That being said, it's not 100% always about about what is financially most sound in life. We're humans. It's ok for us to do things that we enjoy.
When I run credit and someone has a $700/month car payment, do I beat them up? No, because a) that might be their luxury/vice item for all I know, which is 100% fine if it's viewed as a luxury item that they just really personally enjoy and gain happiness from (it's much less harmful than other vices, like drugs or gambling!), and b) I'm the minority opinion holder, aware of this, & not an evangelical, and c) I generally don't know what side hustles they have going on where the car might come in handy, and d) it's not my job to judge.
When I run credit and someone in a high income bracket does not have a car payment, do I give them "yay, we're like minded!" props? Yup.
I will note that it's quite often the case that a 'perpetual tenant' drives up to my office in the flashiest of cars possible, and a humble landlord with millions in net worth drives up in a 15 year old piece of crap.
(/steps down from soap box, we can get back to REI now)
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes10y
Originally posted by @Chris Mason:
Originally posted by @Bill Gulley:
. I don't think Chris meant to say financing depreciating assets is a bad thing, most everyone has a car payment.
This is something that I am certain many here will have to agree to disagree with me on, but I actually meant exactly that: don't finance depreciating assets, including cars. You will know when you can afford a $30k new car when you have $30k in your checking account. :)
That is of course my humble opinion. In my office of debt-peddlers, none of us have car payments, none of us carry credit card balances, but some of us drive some pretty crappy cars. We all have mortgages.
An exception is of course folks in outside sales, which will include many posters here. If that financed BMW adds to your bottom line, it's not a depreciating asset like most cars are, because it is in fact yielding cashflow. If you sum up monthly interest and monthly depreciation of the vehicle, and that yields a number smaller than what you believe you earn in a month because you are driving that car, you're coming out ahead. Same with financed work trucks for the DIY fix-n-flippers or DIY BRRRRrrrrr folks. Financially, that leased or financed vehicle is solid.
That being said, it's not 100% always about about what is financially most sound in life. We're humans. It's ok for us to do things that we enjoy.
When I run credit and someone has a $700/month car payment, do I beat them up? No, because a) that might be their luxury/vice item for all I know, which is 100% fine if it's viewed as a luxury item that they just really personally enjoy and gain happiness from (it's much less harmful than other vices, like drugs or gambling!), and b) I'm the minority opinion holder, aware of this, & not an evangelical, and c) I generally don't know what side hustles they have going on where the car might come in handy, and d) it's not my job to judge.
When I run credit and someone in a high income bracket does not have a car payment, do I give them "yay, we're like minded!" props? Yup.
I will note that it's quite often the case that a 'perpetual tenant' drives up to my office in the flashiest of cars possible, and a humble landlord with millions in net worth drives up in a 15 year old piece of crap.
(/steps down from soap box, we can get back to REI now)
Chris, I do agree with what you're saying and I've seen too many folks get turned down for a home loan over a car payment.
The rule in personal and business finance is never finance a short term asset with long term financing.
Pay as you go is always better, but there can be some exceptions. You certainly must be able to afford what you buy on any credit arrangement.
I bought a new 1600 Classic motorcycle, I walked in prepared to pay cash, the salesman then said "we have a no payment zero interest plan for qualified buyers over 12 months". I tried to nudge the price down because I know their cost of money isn't free, but nope, then I said I'll take it. In about 358 days (just shy of a year) I wrote a check and paid it off. My money remained invested so I used their free money.
While most borrowers won't have large cash reserves, underwriting will look at a credit line and the ability to pay it off in full, so there is a point where debt becomes more irrelevant in a credit situation.
Another point is debts with less than six months payments remaining, these payments generally won't be counted.
True business assets, a car, work truck, crane, front end loader, will have tax deductible interest, expense to the bottom line, the interest may then be computed at an after tax rate, your note rate might be 6%, after taxes it might be 4%. Now, good cash management comes to play on your cost of money and your use of cash, it can be better to finance with an amortization that is paid off prior to the useful life of that asset. Long amortizations will put you under water quickly and your debt load, liabilities will exceed the value of the asset taking you to the red side.
I also believe that sales people or those pumping status as a business ploy are a bit naive and just want the status. With the exception to con artists who may drive a 50-60+K car, smaller less expensive cars are very acceptable. Late model, shinny, clean, no big dents or missing headlight, is fine.
The trick is not to be over extended, don't allow debt to exceed the useful life of an asset, have cash reserves to address any short term debt, I suggest folks keep their installment debt less than 15% of their income, that includes average balances on credit cards being paid off monthly.
Debt is a useful tool, know how to use it or it will turn into a monster and destroy you! :)
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