FNMA and FHLMC Refinance Guidelines

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1 FNMA and FHLMC Refinance Guidelines Lesson Summary Why refinance? There are lots of reasons that your borrower might want to refinance, but most people fit into one (or more) of four basic categories. o Most people want to reduce their monthly payments. o o Some want to consolidate outstanding debt, such as combining a first and second mortgage into a new first mortgage. Some want to tap into built-up equity in their homes. o Some just want to get out of a mortgage product that they don't like, or that's costing too much; going from an ARM to a fixed-rate mortgage, for example. Types of Refinances: o Rate and Term Refinance - Also termed Limited Cash-Out (FNMA) or No Cash- Out (FHLMC). This is a refinance in which the balance of the current first mortgage, and at times any purchase money second mortgage (a second mortgage that closed concurrently with the first mortgage during the purchase transaction), is refinanced. o Cash-Out Refinance - This is a refinance transaction in which the borrower intends to receive proceeds from the new loan. The new loan amount is greater than the funds needed to cover the payoff of any existing purchase money mortgage(s), closing costs and pre-paid items, and the borrower will walk away from closing with any remaining proceeds. Rate and Term Refinance - Limited Cash-Out (FNMA)/No Cash-out (FHLMC) The guidelines for FNMA and FHLMC have many similarities: o FNMA & FHLMC A borrower may receive cash back up to 2% of the unpaid principal balance or $2,000 (whichever is less). o The maximum allowable LTV ratio for fully amortized fixed-rate mortgages secured by one-family principal residences is: o 97% for FNMA if the mortgage is currently owned by FNMA o 95% for FNMA if the mortgage is not currently owned by FNMA o 95% for FHLMC Cash-Out Refinance o The mortgage may be closed using any of the conventional mortgage products that FNMA and FHLMC currently purchase or securitize.

2 o The maximum allowable LTV ratio for fully amortized fixed-rate mortgages secured by one-family principal residences is 80% for FNMA and FHLMC. Great questions to ask your borrower about refinancing: o Are you interested in lowering your monthly payments or getting cash-out? o What is your current monthly payment? Does the payment include taxes and insurance? (If not, Do you know the annual or monthly amount of your taxes and the amount of your homeowner s insurance? ) o What type of loan do you currently have? (Fixed or ARM) And what is your current interest rate? o What is the mortgage balance on your house? And is it your primary residence? o Do you have a second mortgage on the house? What is the balance and payment? Was it obtained at the same time you bought the home (purchase money second)? o What is the current value of your home? o How long have you been in your home? o How long do you plan to stay in your home? Calculating the New Loan Amount

3 The six steps to Rate and Term Refinances: 1. Calculate the new loan amount 2. Run LTV (Check your program guidelines and confirm MI coverage and factor) 3. Determine Product and Rate 4. Run new PITI (Use their current tax and insurance payment) 5. Compare & Justify (Calculate the break-even point) 6. Advise (As to whether or not your customer should refinance) The six steps to Cash-out Refinances: 1. Calculate the new loan amount Balance $ Cash-out $ 1 house payment $ Closing Costs $ (2.5% of balance plus cash-out) Prepaids $ (1% of value) New Loan Amount $ 2. Run LTV (check your program guidelines and confirm MI coverage and factor) 3. Determine Product and Rate 4. Run new PITI (Use their current tax and insurance payment) 5. Confirm Payment and Cash-out 6. Advise (As to whether or not your customer should refinance) The six steps to Maximum Cash-out Refinances: 1. Determine the and New Loan Amount (80% for FNMA & FHLMC) Value x = New Loan Amount 2. Calculate the Max Cash-out (FNMA) New Loan Amount $ Loan Balance $ 1 house payment $ Closing Costs $ (2.5% of new loan amount) Prepaids $ (1% of value) Maximum Cash-out $ 3. Discuss Max Cash-out with customer 4. Determine Product and Rate 5. Run new PITI

4 6. Advise (As to whether or not your customer should refinance) Table A: Guidelines for Rate and Term Refinances FNMA Limited Cash-Out and FHLMC No Cash-Out Refinance Product Type Max CLTV Max HCLTV # of units FNMA FHLMC FNMA FHLMC FNMA FHLMC FNMA FHLMC Primary Residence 1 Fixed (ARM) 97 * (90) 95 (95) 97 * (90) 90 (90) 97 * (90) 95 (95) 97 * (90) 95 (95) 2 Fixed (ARM) 85 (75) 80 (80) 85 (75) 75 (75) 85 (75) 80 (80) 85 (75) 80 (80) 3-4 Fixed (ARM) 75 (65) 80 (80) 75 (65) 75 (75) 75 (65) 80 (80) 75 (65) 80 (80) Second Home 1 Fixed (ARM) 90 (80) 85 (85) 90 (80) 80 (80) 90 (80) 85 (85) 90 (80) 85 (85) 2-4 Fixed (ARM) N/A N/A N/A N/A N/A N/A N/A N/A Investment Property 1 Fixed (ARM) 75 (65) 75 (75) 75 (65) 70 (70) 75 (65) 75 (75) 75 (65) 75 (75) 2-4 Fixed (ARM) 75 (65) 75 (75) 75 (65) 70 (70) 75 (65) 75 (75) 75 (65) 75 (75)

5 Table B: Guidelines for Cash-Out Refinances Product Type Cash-Out Refinances Max CLTV Max HCLTV # of units FNMA FHLMC FNMA FHLMC FNMA FHLMC FNMA FHLMC Primary Residence 1 Fixed (ARM) 80 (75) 80 (80) 80 (75) 75 (75) 80 (75) 80 (80) 80 (75) 80 (80) 2-4 Fixed (ARM) 75 (65) 75 (75) 75 (65) 70 (70) 75 (65) 75 (75) 75 (65) 75 (75) Second Home 1 Fixed (ARM) 75 (65) 75 (75) 75 (65) 70 (70) 75 (65) 75 (75) 75 (65) 75 (75) 2-4 Fixed (ARM) N/A N/A N/A N/A N/A N/A N/A N/A Investment Property 1 Fixed (ARM) 75 (65) 75 (75) 75 (65) 70 (70) 75 (65) 75 (75) 75 (65) 75 (75) 2-4 Fixed (ARM) 70 (60) 70 (70) 70 (60) 65 (65) 70 (60) 70 (70) 70 (60) 70 (70)

6 Notes COURSE V: UNDERSTANDING CONVENTIONAL LENDING