One of my favorite lenders just informed me that the Fannie Mae Desktop Underwriter (DU) Version 10.0 will include several risk factor changes that are likely to change how borrowers qualify. Although it won’t start until September 24th, 2016, buyers with certain risk factors – such as self-employment or pre-foreclosure sales- may be more likely to qualify under the current version of DU (9.3) than under DU (10.0)
Sooooo, it looks like we may want to encourage these borrowers to start the purchase and loan process sooner rather than later. Note: Likewise, borrowers who have been declined under DU 9.3 may be able to qualify under DU 10.0.
Here’s a list he sent over that summarizes the 10 important changes in risk factors coming with DU 10.0 and the potential positive or negative impact of these changes on borrowers, depending on the borrower’s situation.
- Self-Employment: potential negative impact
DU 9.3: Not a risk factor.
DU 10.0: Self-employment income can vary from year to year, so DU will take this additional risk into consideration when the only borrower on the loan is self-employed as his/her primary source of income, or when two of the borrowers on the loan are self-employed as their primary source of income. - Revolving Credit Utilization: potential negative or positive impact
DU 9.3: A borrower whose revolving credit use is high is considered a greater risk than someone who has a history of managing his/her credit card accounts more conservatively.
DU 10.0: The trended credit data will be used to evaluate the borrower’s ability to manage revolving credit card accounts. A borrower whose revolving credit utilization is high and/or who only makes the minimum monthly payment may be considered higher risk, as it indicates the borrower may have trouble making payments in the future. In comparison, a borrower who pays off revolving debt balance may be considered a lower risk.Multiple Financed Properties: potential positive impact
DU 9.3: Cumbersome process with manual requirements for calculating reserves and data entry when applicant owns more than 4 financed properties.
DU 10.0: Fewer eligibility overlays are required, and more weight is given to cash liquidity. Reserves are tiered based on how many financed properties the applicant owns (maximum financed properties still limited to 10). Reserves will now be calculated at a percentage of the aggregate unpaid principal balances of the outstanding liens. - Borrowers without Traditional Credit: potential positive impact
DU 9.3: These borrowers generally cannot qualify.
DU 10.0: Borrowers without a credit score may be able to qualify, based on: borrower’s equity, LTV ratio (90% or less), liquid reserves, and DTI ratio (40% or less). Minimum verifiable non-traditional credit and rent or other housing payment history will be required. - Bankruptcy, Foreclosures, Collections, Etc.: potential negative impact
DU 9.3: Significant derogatory credit events, such as bankruptcy filings, foreclosures, deeds-in-lieu of foreclosure, judgments, tax liens, collections, etc., are considered a high risk.
DU 10.0: In addition to the 9.3 derogatory events, pre-foreclosure sales and mortgage charge-offs will also be considered as significant derogatory credit events. - Loan Purpose: potential positive impact
DU 9.3: The risk ranking, from least to greatest, is: purchase transactions, limited cash-out refinance, and cash-out refinance. Lower LTV/CLTV refinance is viewed as less risky than higher LTV/CLTV refinance.
DU 10.0: The ranking remains the same, but LTV/CLTV will no longer be considered in evaluating the risk of refinance transactions. - Occupancy Type: potential positive impact
DU 9.3: The risk ranking, from least to greatest, is: owner-occupied, second home, low LTV/CLTV investor, and higher LTV/CLTV investor.
DU 10.0: The ranking remains the same, except that LTV/CLTV will no longer be considered in evaluating investor transactions. - Credit Inquiries: potential negative or positive impact
DU 9.3: DU evaluates inquiries made within the most recent 6 months of the credit report date. Multiple inquiries made by several creditors within this frame because a borrower was trying to obtain the best loan rate or terms generally do not indicate higher risk. Borrowers who have frequently applied for, or obtained, new or additional credit represent a higher risk.
DU 10.0: DU evaluates inquiries made within the most recent 12 months. Risk evaluation remains the same, but multiple inquiries made by different mortgage lenders or different auto loan creditors in the same timeframe are not viewed by DU as multiple inquiries. - Mortgage Accounts: potential positive impact
DU 9.3: Borrowers with no history of mortgage obligations are considered a higher risk than borrowers who have had mortgage obligations.
DU 10.0: DU no longer views borrowers with no mortgage history as a higher risk than those who have had mortgage obligations. DU instead looks at how the borrower manages debt for all types of installment loans (mortgages, auto loans, student loans, etc.). - Delinquent Accounts: potential positive impact
DU 9.3: Late payments have a negative impact on the borrower’s credit profile, and a history of paying a mortgage loan late will have an even more negative impact on the credit profile.
DU 10.0: Mortgage delinquencies will no longer be viewed as higher risk than non-mortgage delinquencies.
Just had to share …