Getting an ARM? Sooner Is Better than Later

Fannie Mae changed its guidelines (again) and as usual the changes do not favor borrowers. Its guidelines will be updated over the next twelve weeks to reflect the following:

* Adjustable rate mortgage (ARM) qualifying will be more difficult.
* Interest-only loans will be almost impossible to obtain.
* Perennially-popular 7/23 mortgage products will be discontinued.

Qualifying changes will primarily affect those who want hybrid ARMs. Currently, if you choose the most popular hybrid, the 5/1 ARM, you get a rate of about 4%, fixed for five years, and you qualify at the 4% interest rate. For a $200,000 mortgage with taxes and property insurance at $200 a month, you'd need income of about $4,125 a month.

However, under the new rules, you have to qualify at the HIGHER of your fully-indexed rate (calculated by adding today's value of your index plus your margin, which at the May 13th 1-year LIBOR of 1.13% plus a typical 2.75% equals 3.88%) or your start rate plus 2%, which equals 6%. Using the 6% figure, your income for that same $200,000 mortgage would have to be almost $1,000 a month more, at $4,996. It's obvious that many who qualify today will not tomorrow.

Now, on to the interest-only feature. You won't get this option on an investment property. That will disappoint a lot of landlords who use it to maximize their cash flows on rentals. You also won't be allowed to use it for duplexes, triplexes, or fourplexes, even if you live in them. You'll need a credit score of at least 720. And (here's the deal-killer) you'll need enough money in the bank to make your mortgage payment for two years! Fannie really doesn't want to be doing interest-only loans!

Finally, here's the scoop on the 7/23, also called the seven year balloon. This loan isn't that popular today because fixed rate loans are so cheap. But when rates rise, many choose the 7/23, which offers a fixed rate for 7 years, makes one adjustment, and remains fixed for the other 23 years of the mortgage. When rates are higher, this loan can be one or more percent lower than a 30-year fixed-rate loans. Except it won't, because it will be gone.

How much time do you have? Changes for electronically underwritten loans (which means most loans) go into effect after the weekend of June 19th. Manually-underwritten loans will change starting August 1st. All mortgages must be delivered to Fannie Mae before August 31st.