Fannie Mae Updates Underwriting System to Expand Eligibility

Fannie Mae Updates Underwriting System to Expand Eligibility

Written By: Joel Palmer, Op-Ed Writer

Fannie Mae is updating its automated underwriting system to help potential borrowers who lack a credit score.

Fannie said in its announcement that the enhancements will “help historically underserved borrowers access credit,” especially Black and Latino/Hispanic people who are disproportionately credit invisible.

The enhancements took effect on December 10 . Fannie said the changes to its Desktop Underwriter (DU) system will expand mortgage eligibility and simplify the process.

The changes include:

• Updating the eligibility criteria to permit one- to four-unit properties (including manufactured homes) up to standard LTV, CLTV and HCLTV ratios and up to the standard maximum allowable debt-to-income ratio of 50 percent.

• Using borrower-permissioned bank statement data to enhance the DU risk assessment. Data is gathered through a third-party asset verification report containing 12 months of data. DU will assess or consider a borrower’s cash flow by reviewing transaction patterns, balance trends and other observations over time in their checking and savings accounts and investment accounts.

• Providing an automated option for lenders to meet Selling Guide requirements to document nontraditional credit sources.

Fannie Mae said its preliminary research has shown that assessing a borrower's cash flow activity through bank statement data can make more predictive risk assessments, especially for consumers with no or limited credit history.

"We believe consumers should benefit from their responsible money management habits and a steady stream of income when buying a home, even if they don't have an established credit history," said Malloy Evans, Executive Vice President and Head of Single-Family Business at Fannie Mae. "Traditional lending practices make it hard for borrowers with no credit score to access credit, so we've taken steps that may help them responsibly qualify for a home loan using data that provides a more holistic view of how they manage their money.”

The underwriting changes are part of Fannie’s Equitable Housing Finance Plan, a three-year plan that outlines ways the enterprise will knock down barriers faced by Black homeowners and renters.

Fannie said the plan includes homebuyer education, pilot programs to improve credit scores and security deposit alternatives as well as the creation of Special Purpose Credit Programs (SPCPs) to serve specific areas of need and opportunity, such as down payment assistance.

Fannie laid out a three-step process after lenders have ordered a credit report and verified that the borrowers do not have a credit score:

1. Educate the borrower about the asset verification process, how it works, and obtain consent to order a report.

2. Order a report with 12 months of asset data from an authorized verification report supplier and enter the reference ID in DU.

3. Review the DU Underwriting Findings messages to see if the bank statement data has been considered.

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About the Author

As an NAMP® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.