Last Wednesday, I got to speak face-to-face with Steve Lojan, an executive at Fannie Mae, which gave me the opportunity to ask about the new DU10.0 underwriting program that has caused some confusion.
The main controversy has to do with carrying a balance on your credit card. Will consumers be penalized for paying the amount owned in full, or for not paying in full? This is important information to know, because it affects all our credit scores.
Which Type of Credit Card User are You–a Revolver or a Transactor?
A revolver is a person who carries a balance on his or her credit card from month to month. A revolver might pay only the minimum balance due or more, but not the entire balance.
A transactor is a person who pays off the entire transaction or entire balance each month. A transactor never pays credit card interest, because no balance is carried over.
The credit bureaus consider transactors to be less risky, because by paying for everything they purchased when the bill comes due shows that they are living within their means.
The new DU10.0 will also differentiate, but this is where the confusion comes in. Revolvers will not be penalized by Fannie Mae’s new program. As long as the revolver pays the minimum due (which is their contractual right), then they will receive the same mortgage approval as the transactor.
“We are making it easier, not harder, for people to get approved for a mortgage,” Mr. Lojan said.
Please note: This is regarding the automated underwriting system for a home loan, not the credit score. To save money and get the highest credit score, you must be a transactor who keeps a low balance-to-limit ratio.
The credit bureau does not keep a running daily tab on your credit card balance. The bureaus only know what the creditor reports (monthly).
An emerging type of data gathering called trended data or “time series payment data” is changing this. Equifax and TransUnion now have the ability to collect payment information from data furnishers even if there is no balance on the card at the time of reporting. The amount paid monthly on a card can now be collected and furnished to DU to be used in its decision making process.*
More Leniency for Mortgage Lates
Fannie Mae’s new program will no longer penalize a late payment on a mortgage more heavily than a late payment on a car or other installment loan.
Less Leniency for Short Sales
DU10.0 will count short sales and mortgage charge-offs the same as foreclosures (the worst/most serious derogatory credit).
Change to Inquiries
Too many mortgage inquiries (over three for some lenders, over six for others) triggers a red flag for the underwriter. The underwriter begins asking suspicious questions, such as: Why is this person applying for so many loans? Have our competitors been turning them down? And if so, what do they know that we don’t? The borrower is required to explain all the inquiries.
The new DU10.0 will treat all mortgage inquiries made within 30 days the same as one inquiry — just as the credit bureaus have been doing. Hopefully, this will eliminate the need for a Letter of Explanation to be signed and placed in the loan file; although, I don’t expect many underwriters to change their habit quickly.
If you have any questions, please let me know and I will do my best to get answers.
Many thanks to Jared Kluver for suggesting this topic.
*Thanks to Chad Kusner at Credit Repair Resources for the information about trended data.
For home buyers who are waiting to hear back on an offer to buy a short sale property, it’s been a lot like waiting for a personal letter from Santa. Many folks lose faith long before it happens. I know buyers who made offers on more than 20 homes and still were not home owners. That’s a lot of time and effort, for both them and their real estate agents. Now Freddie Mac (the Federal Home Loan Mortgage Corp, a government sponsored enterprise) aims to improve this situation by shortening the time.
The company that handles the current home owner’s loan (the servicer) now has 30 days to make a decision on your offer — if they have the authority to do so. However, if a different bank actually holds the loan note so that the servicer is required to pass it along, they have 60 days to respond.
Yes, waiting two months is better than waiting six to twelve months, as happened so often last year, but it’s still a long time to put your life on hold while you wait in suspense. By contrast, a private party selling a home will typically respond to your offer within one to three days.
Servicers are required to acknowledge receipt of your offer within three days, so at least you know your offer didn’t fall into a black hole or get eaten by a dog.
If the servicer ends up needing more time than 30 days to review your offer, they must provide you with a weekly status update.
Why should it take a month or more to decide whether or not they’re willing to sell for the price and terms of your offer? One scenario is when they want to wait to see what other offers might come in. Another scenario is that it takes a committee of bankers to approve a short sale; and frankly, getting that one property off their books is not a priority for them.
If your dream home is a short sale situation and you don’t mind waiting a month or more with the understanding that your offer might not be accepted, then proceed with patience. But if you don’t have the time or emotional endurance for a long haul to close, then speak with your Realtor about limiting the homes you preview to ones that are owned by private parties.