Why Haven’t Loan Officers Been Told These Facts?
Careful with That DTI

Be mindful of mixing and matching credit policy.

It is not uncommon for MLOs to unintentionally mix and match credit policy among various agency products. Couple policy errors with unknown lender overlays and underwriting outcomes can get unpredictable and disappointing.

In particular, third-party originators can find themselves disadvantaged in the communications loop. Accordingly, to minimize unanticipated underwriting outcomes, first, go to the policy source and verify that the deal parameters are doable and clearly within the agency’s policy. Additionally, communicate recent policy changes and effective change dates impacting the loan to the fulfillment partner. Lenders make mistakes, too.

To a degree, FNMA and FHLMC have somewhat homogeneous risk management policies. In the aggregate, their regulator, the FHFA, closely manages risk practices. However, the agency’s discrete risk policies do differ sometimes. Consequently, awareness of credit policy differences at the transaction level can be pivotal in successfully closing the loan. When material, ensure you and the lender are on the same page as far as the intended investor.

As said about challenging situations, “prepare for the worst, but hope for the best.” Some folks confuse that with “hope for the best,” leaving out preparation for the worst. Case in point: manual underwriting. The FHLMC states, except, in rare circumstances, the Borrower’s DTI should not exceed 36% for cash-out refinance or mortgages secured by multi-family property.”

Rather than tossing the Hail Mary Pass or developing and arguing immaterial offsets, if the MLO knew that FNMA might allow greater flexibility for >36 DTI provided there are enumerated compensating factors (credit score-driven reserve requirements), why did he risk the lender knowing how to underwrite or place that loan? Remember the reach and impact of process inefficiencies, and never underestimate their impacts.

Nuances and Provisos: Example, FHLMC 5102.2(b)(i) Cash-out

For Non-Loan Product Advisor Mortgages, the Seller must presume the Borrower’s capacity to repay is not acceptable when the following conditions exist:

  • The transaction is a cash-out refinance, and
  • The monthly debt payment-to-income ratio exceeds 42%, and
  • Any Borrower has an Underwriting Score less than 700, and
  • The total loan-to-value (TLTV) ratio is greater than 75%

For manually underwritten single-family cash-out, FNMA allows for 80% LTV/CLTV up to a 45% DTI with a 700 score and a two-month reserve.

Some lenders have fairly sophisticated routing algorithms to help sort this stuff out. However, even the best programming could be better. Why leave things to chance?

Does the Agency allow for waivers and all that sort of thing? Yes, sometimes. But why turn a straightforward submission into a loan requiring a herculean effort?

Furthermore, the lender’s relationship with the investor and its history of underwriting exceptions will often dictate how rare the exceptions should be. As much as specific credit offsets matter, the lender or underwriter’s confidence that they won’t get dinged for the loan matters, too. Again, why depend on extra work and exceptions to get the deal done right on the first pass?

Another word of caution: beware of instances when the lender or investor’s stated credit policy is more lenient than the norm. Rather than the investor having a higher risk appetite than its peers, it is possible that the lender or investor has failed to articulate its risk policies clearly, creating an air of uncertainty in underwriting execution.

FHLMC 5401.2(c) Evaluating debt ratios

For Manually Underwritten Mortgages, the Seller must evaluate the Borrower’s ability to pay the monthly housing expense and other obligations. When the Borrower’s monthly debt payment to income ratio exceeds 45%, the loan is ineligible for sale to Freddie Mac. As a guideline, the monthly debt payment-to-income ratio should not be greater than 33% to 36% of the Borrower’s stable monthly income.

    • When the Borrower’s monthly debt payment-to-income ratio exceeds 36%, the Seller must document in the file the justification for the higher qualifying ratio.
    • Except in rare circumstances, the Borrower’s debt payment-to-income ratio should not exceed 36% for the following Mortgages:
      • Cash-out refinance Mortgages
      • Mortgages secured by 2- to 4-unit properties
      • Mortgages where there is evidence that the Borrower increases debt and then periodically uses refinance or debt consolidation loans to reduce payments to a manageable level

In addition, the examples listed below may be used to justify higher qualifying ratios for Non-Loan Product Advisor Mortgages. These examples may not be used to justify higher qualifying ratios for Caution Mortgages (AU finding “Caution Mortgage”) because they have already been considered by Loan Product Advisor.

    1. The Borrower’s verified liquid assets are substantial enough to evidence an ability to repay the Mortgage regardless of income.
    2. A Down Payment on the purchase of the property of at least 25%.
    3. The Borrower’s strong Credit Score (for example, a 740 or higher FICO® score) and the Seller’s confirmation that the Borrower’s credit reputation is excellent.

FNMA, Maximum DTI Ratios

For manually underwritten loans, Fannie Mae’s maximum total DTI ratio is 36% of the borrower’s stable monthly income. The maximum can be exceeded up to 45% if the borrower meets the credit score and reserve requirements reflected in the Eligibility Matrix.

FHLMC – Evaluating debt ratios

FNMA – Eligibility Matrix

FNMA – Maximum DTI Ratios


Do you have a great value proposition you’d like to get in front of thousands of loan officers? Are you looking for talent?

BEHIND THE SCENES – Agency Credit Report/Credit Score Changes Underway

For nearly 30 years, the GSEs have required lenders to deliver credit scores based on the Classic FICO model. In 2014, the Federal Housing Finance Agency (FHFA) and the GSEs began an effort to modernize the credit score model requirements. In 2018, Congress required FHFA to create a process for validating and approving credit score models. The validation and approval of FICO Score 10 T and VantageScore 4.0 is the result of a lengthy effort by FHFA and the GSEs to further support innovation and inclusion in credit score models used by the GSEs.

The GSEs plan to migrate to an “average score” calculation. Research has shown that the proposed average methodology is a better representation of the risk of the loan and could reduce impact to borrowers from the change in methodology.

The GSEs are working toward a September 2023 target release date for the updated Uniform Loan Delivery Dataset (ULDD) specifications (spec). The spec will be inclusive of changes required for the bi-merge credit report option, updated average borrower representative credit score calculation, as well as the new FICO Score 10 T and VantageScore 4.0 credit scores and related Representative Scores/Indicator Scores with to-be-determined implementation dates where appropriate.

The Uniform Loan Delivery Dataset (ULDD), part of the Uniform Mortgage Data Program (UMDP), is the common set of data elements required by Fannie Mae and Freddie Mac for single-family loan deliveries.

Get the agency Playbook here:

Get the FNMA/FHLMC Partner Credit Playbook


Tip of the Week – Are You Phobic About Implementing New Services, Programs, or Products?

What must you do to overcome the fear that keeps you from success?

Last week, the Journal addressed fear and apprehension of the unknown related to new products or services. Fear is often more of a reflex than a deliberation. Additionally, folks generally associate the unfamiliar with suffering or fear more than possible upside benefits.

Learned behavior starts at a young age. Envision a young child having a wild mushroom violently slapped from his fingers by their watchful guardian. Likewise, as adults, something slaps at us when faced with the unknown. Our conditioning says run, fight, or duck. There is also a close nexus between the unfamiliar, trust, and safety.

Trying a new variety of mushrooms from the grocer’s wares is okay. Sampling a strange fungus from the backyard can have life-threatening consequences. The grocer says the mushroom is good to eat, so maybe you should try it. Your goofy neighbor suggests you try their wild mushroom harvest, and you decline, “Mmm, Mmm, looks good, but I’m allergic to mushrooms.” No, in truth, you are allergic to taking candy from strangers. Very few people would admit to their neighbor, “I’m good. I’d rather avoid an episode of explosive diarrhea while sleeping.”

As an adult, the aversion to fear or suffering reflex is still alive and well. It screams, stay between the lines, and don’t stray from the pack. Danger lies around the corner, and wisely so. Must you burn your flesh to know that the stove burners are hot?

However, the fear reflex necessitates closer examination. When encountering value propositions, remember that the risk is merely an uncertainty. The uncertainty is the risk magnitude, probability, and impact. On the downside, you could get hurt significantly. On the upside, you profit significantly. The evaluation to move ahead in the face of substantive risk is often called the “Calculated Risk.”

Calculated Risk

(1) : a hazard or chance of failure whose degree of probability has been reckoned or estimated before some undertaking is entered upon.

(2) : an undertaking or the actual or possible product of an undertaking whose chance of failure has been previously estimated -“Calculated risk.”
Merriam-Webster.com Dictionary

Fear does not automatically indicate a time to fight or run. It might be time to think. When facing a value proposition, consider fear a call to action rather than a precursor to anxiety.

Social Phobia

Social phobia is the fear of social situations. This phobia can be quite debilitating, and for some, it can become so severe that it causes people to miss events, places, and people who are likely to trigger an anxiety attack. People with social phobia fear being watched or humiliated in front of others. The most common form of this phobia is a fear of public speaking. – Baptist Health

Most folks suffer from some degree of social phobia. Many people would admit to at least getting the butterflies before important gatherings that require public speaking. Does that make one phobic about speaking? Not necessarily. This anxiety is a common fear that people overcome every day. It is appropriate to be concerned about wasting an opportunity to bring value to many people.

To mitigate their fear of public humiliation, the speaker might carefully research their speaking subject and practice the presentation. Having a subject matter expert evaluate and approve the presentation might help build the presenter’s confidence. The speaker breaks down their specific fears and determines how to manage these concerns appropriately.

Next week, the Journal features an MLO success story in overcoming implementation fears.

From Baptist Heath – The Top Ten Phobias

  • Acrophobia is the fear of heights, affecting more than 6% of people.
  • Aerophobia, or the fear of flying, affects between 10% – 40% of U.S. adults.
  • Arachnophobia is the fear of spiders and other arachnids.
  • Ophidiophobia is the fear of snakes.
  • Cynophobia is the fear of dogs.
  • Trypanophobia is the fear of injections.
  • Astraphobia is the fear of thunder and lightning.
  • Agoraphobia is the fear of being alone in a situation or place where escape might be difficult.
  • Mysophobia is the excessive fear of germs and dirt.
  • Social phobia is the fear of social situations.

From the National Institutes of Health

Specific phobia is an intense, irrational fear of something that poses little or no actual danger. Although adults with phobias may realize that these fears are irrational, even thinking about facing the feared object or situation brings on severe anxiety symptoms.”