Fannie Mae Underwriting Guidelines

Fannie Mae underwriting guidelines state which mortgages are acceptable in order to be packaged by lenders and sold to Fannie Mae. It's a common practice for lenders to package bundles of mortgage loans and sell them to Fannie Mae while still retaining the servicing of the loans, but the only loans Fannie Mae will purchase are those loans acceptable through underwriting standards.

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Fannie Mae purchases bundles of conforming loans from lenders. Conforming refers to loans that follow the Fannie Mae underwriting guidelines, or in other words, the loans do not exceed the limits set by Fannie Mae and additionally have all the qualifying factors set forth by Fannie Mae.

Underwriting is the process a loan goes through that involves all the aspects of the application making the loan acceptable for funding. Some aspects of underwriting include:

• The applicant's income
• The amount of the mortgage loan
• The applicant's employment history
• The applicant's net worth
• The applicant's credit rating

Other items are included within the underwriting process, but exactly what is reviewed is up to each lender. Every lender has its own underwriting guidelines, but only if these guidelines are in line with Fannie Mae underwriting guidelines do they then become eligible to be sold to Fannie Mae.

Oftentimes lenders use automated underwriting programs, which means that all mortgage loan applications are run through a computer program for the credit decision. Human underwriters are usually on staff to take a final glance at applications before the loan goes to closing or to do a second review of denied applications at the request of the borrower.

Underwriting is designed to ensure that a potential borrower is likely to pay the loan back. All the aspects of underwriting – income, credit score, etc – are used to predict the likelihood of timely payments. Statistical data indicate that people with low credit scores and low income are less likely to make timely payments and avoid foreclosure than people with higher credit scores and higher incomes. An applicant's employment history is also considered a fairly good indicator of whether a loan will be paid on time or not.

When a loan officer tells you that your loan is going through underwriting it means that your loan application is being reviewed to make sure that your application falls within the standards set forth by the lender. In many instances, these standards are identical to the underwriting standards set forth by Fannie Mae.

Lenders who do not bundle and sell mortgages to Fannie Mae do not have to follow the same underwriting guidelines. These mortgage loans are often considered subprime and may have higher interest rates or more fees, although this is not always the case.

Why should lenders care about what guidelines Fannie Mae has for mortgage loan underwriting, especially when Fannie Mae doesn't issue loans to consumers? Mortgage lenders care about Fannie Mae guidelines because they want their mortgage loans to be eligible for purchase. Most consumers don't realize that mortgage loans are bundled (in other words, placed in a large group with other similar loans) and then sold to other organizations. Original lenders may retain servicing of the loans, so the truth is that some borrowers may never know that their loans were sold because nothing changes for them. In fact, many borrowers don't realize their loans were sold until they contact their lender and inquire about a rate modification or some other program available only to loans still within the lender's portfolio.

Packaging and selling bundles of mortgage loans is big business within the mortgage industry. Loans that follow Fannie Mae underwriting guidelines can be sold, freeing up funds for lenders to make more mortgage loans. It is quite a common practice.

Fannie Mae changes the underwriting guidelines periodically. To find out what the current guidelines are, visit the Fannie Mae website. You can also ask your lender about the most recent underwriting guidelines.

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