You better double check with your Mortgage Professional. As of Sunday, July 22, 2007 underwriting guidelines are tightening up for interest only conventional (loan amounts $417,000 and lower) mortgages.
- Fixed Rate Mortgages (ex. 30 year fixed with 10 year interest only payments) will be based on the full PITI payment using the Note Rate. (If there is a temporary buy down, the qualifying is still based on the Note Rate).
- Interest Only ARMs: Qualifying is based on the full principal and interest payment (PITI) at the fully indexed rate (index + margin).
- Negative Am. (deferred interest) ARMs: Qualifying will be based on the full PITI at the fully indexed rate amortized over the full repayment term using the loan amount based on the amortization cap. (I am not a fan of Option ARMs and I have never provided one to any of my clients. For some people, they have probably been very successful tools…most of my clients, once they understood how the mortgage works, would opt for an interest only ARM instead of this mortgage).
So what does this mean?
Previous Guidelines: If a buyer was preapproved using a 5/1 Interest Only LIBOR ARM based on an interest rate of 6.125% earlier this week qualified for a payment in the amount of $2041 (plus taxes and insurance), they could borrow $400,000.
New Guidelines: The current index for LIBOR is 5.4 plus the margin of 2.375% for this particle loan program = a fully indexed rate of 7.775% for the same ARM mentioned above. Qualifying the borrower for a $2041 payment based on a 30 year amortization at 7.775% means the borrower now qualifies for a loan amount of $284,200.
This will obviously have a dramatic impact on purchases and refinancing out of interest only products. This is still very new and we'll see if non-conforming products follow suit.
Here's what you need to do:
- Agents: Contact your Mortgage Professional today to see if you have clients who are preapproved for conventional financing with any interest only payments. Confirm your buyer is still qualified. (Your LO may need to check Fannie Mae guidelines).
- Buyers/Borrowers: If you're using interest only products with loan amounts of $417,000 or less, contact your Mortgage Professional to verify you are still approved.
- Buyers: Now more than ever, it's crucial that you meet with a Mortgage Professional prior to buying a home to become preapproved. With mortgage programs and underwriting "tightening", there will be less options compared to just a few months ago.
- Buyers/Borrowers: Having solid credit is also more important. You should review your credit a couple times a year. If your scores are below 680, work on improving your credit.
- Borrowers who currently have ARMs: Do not wait until just before your ARM is about to adjust if you are considering retaining your home. Contact your Mortgage Professional six months in advance to review your credit in case you need to make adjustments and/or repairs.
This is not the time to be hiding or not dealing with your mortgage...guidelines are changing quickly and you need to be proactive and responsible with your largest investment. If you need help, find a qualified Mortgage Professional such as a Certified Mortgage Planning Specialist, who has been acquired additional training and education or get a referral from someone you trust and respect.
