If you've had past credit problems or can't save up enough to cover a large down payment, Fannie Mae and Freddie Mac may have just cut you a break when it comes to getting a mortgage.
Stricter credit score limits, large down payments and even heavy paperwork requirements have kept many would-be borrowers from buying a home in recent years, but new rules put in place by the government-sponsored enterprises may change that.
The new guidelines, which took effect this week, resulted from an agreement in October that clarifies when lenders would be penalized for making mistakes on mortgages they sell to Fannie and Freddie. Lenders have blamed the lack of clarity for tight credit conditions that have made it difficult for many consumers to qualify for a mortgage, The Wall Street Journal reported.
Here's what you need to know.
Lower Credit Score Requirements
Fannie Mae and Freddie Mac have a 620 credit score approval threshold for conventional loans, but many lenders had said they weren't sure what that limit was. By extension, they said they were hesitant to approve consumers with subprime credit scores, fearing those applications would be delayed or ultimately denied.
Under the new rules, Fannie Mae and Freddie Mac have made their credit score and history requirements more transparent. As a result, lenders are likely to ease up on consumers who have lower credit scores or a black mark on their credit histories from a one-time events such as job loss or a big medical bill.
In the past, many lenders imposed extra requirements--known as credit overlays--on consumers with past credit mistakes. For example, consumers with a past credit mishap would often have to write a letter explaining the mistake before the lender would approve their loan. This situation will definitely change, said Jason van den Brand, mortgage expert and CEO of online home refinancing service Lenda.
"The supplemental stuff that drives everyone nuts will decrease gradually," van den Brand said. "Like being required to write a letter explaining why their credit was pulled for the loan they're applying for. Hello! It's [being] pulled because they are getting a home loan. That stupid stuff hopefully goes out the window and saves homeowners a bunch of headaches."
Previously, if you had late payments on your credit card or a small unpaid bill, the lender might have been willing to approve you--but also required you to write and submit a letter of explanation for the mishap, adding more paperwork on your end.
Under the new rules, many lenders may remove or lower the number of credit overlays they include, meaning less paperwork for you.
A Possible Change in Processing Times
In recent years, getting a mortgage could take several weeks or two months. But will those new rules change that?
"Yes, but only slightly, and this is just a stepping stone," van den Brand said. "You might see a day shaved off the process, but don't expect anything drastic."
The application process will still be the most time-consuming factor for buyers. However, processing times might speed up if more lenders start going paperless.
"Once technology is enabled to allow folks to get their required documentation faster online, the whole process will really speed up," he added. "Digital is the answer, and we're much closer to that than most people realize."
More Changes in the Works
Fannie Mae and Freddie Mac may issue even more changes that benefit consumers in the future. According to Forbes, the enterprises are considering lowering the minimum down payment requirement from 5% to 3% for government-insured conventional loans.
What This Means for the Future Market
The relaxing of credit scores could mean more people buying houses and a boost to the market. A study from the Urban Institute published in March found that if credit requirements were relaxed to "normal levels," about 1.2 million additional home loans per year could have been made.
And while these new rules may help some buyers get that home, don't expect any overnight miracles for the housing market.
"It's not going to solve the perceived housing problem," van den Brand noted.