There has been some recent excitement about Fannie Mae (FNMA) changing her guidelines on down payments and allowing gift funds as an acceptable form of down payment in lieu of a borrower’s own funds. Before we all get excited about FNMA getting a little FHA in her with respect to gift funds, we need to realize that the guidelines for mortgage insurance and FNMA are not aligned. So long as they aren’t, this change will only have minimal effect.
This chart outlines the new accepted forms of down payment from FNMA’s perspective:
Here’s the Fannie definition of acceptable donors for gift funds, “A gift can be provided by: (1) a relative, defined as the borrower’s spouse, child, or other dependent, or by any other individual who is related to the borrower by blood, marriage, adoption, or legal guardianship; or (2) a fiancé, fiancée, or domestic partner.”
The problem with this comes into play when we realize that these loans must be insured and mortgage insurance companies, as of now, are still requiring 3 percent of the borrowers own funds. One way we’ll be able to use this change right away would be to do 95% financing using 3% of the borrower’s own funds and 2% of gift funds. Other than that, we’ll have to cross our fingers that the mortgage insurance companies loosen up on this as well and there’s some indication to suggest that they might by using the North Dakota bond programs as a crystal ball. RMIC (Republic Mortgage Insurance Company) will require 1000 or 1% whichever is higher of the borrowers own funds on North Dakota bond programs. They allow this because these loans perform well. Perhaps they’ll change their agency loan underwriting guidelines to be the same if they believe FNMA loans will perform well. This is the kind of thing MI companies will be evaluating as the new guidelines are rolled out.
What I believe is that most exciting change is that they no longer have the FLEX 97 program. Instead, they are simply increasing the eligible loan to value on purchases and no cash out refinances to 97% and removing the FLEX pricing add on. See the new chart below:
With FHA raising their annual mortgage insurance, private mortgage insurance at 97% is going to start to look pretty good. Especially since it’s easier to get rid of. After FHA reduces the allowable seller concessions from 6% to 3 or 4% (we’ll see), these two products will go head to head in a meaningful way (and that is likely the intent here). The other guideline changes had to do with scrutinizing income and liabilities and they’d previously cracked down on debt to income ratios. It would appear that in exchange for that, now they want to take market share back from FHA. But until private mortgage insurance companies come along for the ride, we’ll just have to wait a little longer as far as gift funds are concerned.
Charles Dailey – Branch Manager, Loan Officer, Certified Military Housing Specialist – CA DOC, MN DOC & WI DFI
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