Our Terms of Service and Privacy Policy have changed.

By continuing to use this site, you are agreeing to the new Privacy Policy and Terms of Service.

Fannie Mae to make qualifying for interest-only loans tougher

By Les Christie, staff writer


NEW YORK (CNNMoney.com) -- Fannie Mae, the government-backed mortgage giant, announced Friday that it would tighten lending requirements for the interest-only loans and adjustable rate mortgages (ARMs) it backs.

To get a Fannie Mae-backed interest-only mortgage, for example, homebuyers will have to make down payments of 30% of the sale price.

For adjustable rate mortgages, Fannie will only buy those underwritten to ensure that borrowers could still afford payments even if their interest rates reset to the higher of either 1) the loan's initial interest rate plus two percentage points or 2) the fully indexed rate. The fully indexed rate is based on an index that represents the cost of funds at the time of the loan plus a specified margin.

For a loan with a beginning rate of 5% and a fully indexed rate of 6%, for example, borrowers would have to demonstrate they could keep up payments even if the rate rose to 7%. If the fully indexed rate is 8%, borrowers would have to be able to afford an 8% loan.

"Our goal is to make sure consumers can sustain their mortgages and remain in their homes over the long term, while helping our lender partners offer a range of mortgage products for qualified borrowers," said Marianne Sullivan, Senior Vice President of Single Family Credit Policy and Risk Management at Fannie Mae, in a prepared release.

"These policy changes reflect our intention to continue providing liquidity to different market segments by ensuring that support for ARM products remains in appropriate circumstances," Sullivan said.

Fannie does not issue mortgages itself; it buys them from lenders. But few lenders will issue loans these days unless they can sell them to Fannie Mae.

Fannie Mae (FNM, Fortune 500) will also demand that borrowers of interest-only loans have credit scores of at least 720 and sufficient cash cushions to be able to continue mortgage payments and other housing expenses for 24 months.

Meanwhile, Fannie says it will stop funding so-called balloon mortgages. With these, borrowers pay at a rate lower initially than the nominal interest rate on their mortgages. The difference between the two builds up every month and has to be repaid with one huge payment at a specified date.

Many borrowers saw those balloons swell to unmanageable proportions and lost their homes when they couldn't afford or refinance the balloon payment.

The new guidelines go into effect after August 31. To top of page


Overnight Avg Rate Latest Change Last Week
30 yr fixed4.01%4.14%
15 yr fixed3.18%3.29%
5/1 ARM3.24%3.30%
30 yr refi4.01%4.14%
15 yr refi3.19%3.31%
Rate data provided
by Bankrate.com
View rates in your area
 
Find personalized rates:
Index Last Change % Change
Dow 20,661.30 -6.71 -0.03%
Nasdaq 5,821.64 27.82 0.48%
S&P 500 2,348.45 4.43 0.19%
Treasuries 2.40 -0.04 -1.64%
Data as of 6:50am ET
Company Price Change % Change
Bank of America Corp... 22.94 -0.08 -0.35%
Ford Motor Co 11.77 0.05 0.43%
Advanced Micro Devic... 14.10 0.28 2.03%
Nike Inc 53.92 -4.09 -7.05%
Wells Fargo & Co 55.33 -0.52 -0.93%
Data as of Mar 22

Sections

The typical plan on the individual market would have a deductible of $4,100, an increase of 61%, according to a Kaiser Family Foundation report. More

The advertiser backlash to Google is growing. Major brands have halted ads on certain Google platforms after learning their promotional posts were appearing alongside extremist content. More

Your credit score plays a major role in your personal finances. The better the score, the better it is for your wallet. Here's how to help get it above the 800 mark. More