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Fannie Mae to Require Higher Credit Score

By Sally Maison
Published: Wednesday, December 2nd, 2009

Mortgage securer Fannie Mae plans to increase credit score requirements starting next month and limit the amount of total amount of debt borrowers can carry in relation to their income. The government-sponsored enterprise (GSE) says the move will help them ensure that they can continue to provide loans to American homeowners in the future.

Fannie Mae to Require Higher Credit ScoreStarting December 12, the software system that Fannie Mae uses to review loan applications will reject borrowers whose credit ratings are below 620 in the FICO credit score system, which ranges from 300 to 850. The previous cut-off stood at 580. Officials from the GSE say loan applications that do not meet the new credit score requirements will be rejected even if applicants are able to meet the 20 percent down payment.

Additionally, borrowers with a 20 percent down payment will be rejected if 45 percent or more of their monthly income goes into paying debts. GSE officials refuse to reveal what the current limit for debt-to-income ratio is, but they said it is higher.

A spokesman explains that the new regulations reflect the company’s experience. Many homeowners prior to the recession lost their homes to foreclosure or short sale after being unable to meet mortgage obligations because of excessive borrowing.

Fannie Mae reports that a person whose credit score is below 620 is nine times more likely to fall behind on his mortgage payments than someone who has a higher credit rating. Borrowers who are already facing many obligations to creditors also showed strong likelihood of falling into delinquency.

Fannie Mae spokesman Brian Faith explains that they do not only want people to buy a home, they also want to help make sure that they are able to keep it.

However, finance experts assure the public that there is no reason to be daunted by the new lending standards. They tell consumers that if they are not able to meet the requirements, they only have to work towards improving their credit score. One of the best methods of doing so is by paying debts, especially credit card balances, on time.

Consumers are urged not only to pay month balances, but to also pay more than their creditors require them. Specialists also warn consumers about opening too many accounts this holiday season, since it could hurt their credit rating aside from placing them in a very great risk of being not able to pay their debts. Consumers who are planning to catch up with the federal tax cut on home purchases are advised to work on their credit score now since the deadline has been extended to April 2010.

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