Mortgages, Renters, and First Time Homebuyers

I do what I do – represent my buyer and seller clients – well. I’m always learning, and I’ll never say I know all that I need to know. Part of doing what I do is associating and learning from people who know more than I do. Matt Hodges with Gray Fox Mortgage* is one of those people.

Matt and I were talking the other day about new Fannie/Freddie guidelines and he said two things that struck me — 1) first time homebuyers are less risky than second+ homebuyers, and rental history was now allowed to be used when qualifying buyers. I asked him to send me what he was talking about; when I got it, I asked him to write something for you, so we can all learn something.

Yes, some of it is inside baseball jargon, and yes, it’s important to understand parts of what happens on the mortgage side.

From Matt

For most borrowers buying a new or resale home, the loan officer working with you will first evaluate your ability to purchase using accepted maximum debt to income ratios. This is an eye ball check to make sure that you aren’t trying to obtain a loan that Freddie Mac, Fannie Mae or Ginnie Mae won’t allow. But, that visual review of your income and debt load and assets and credit report isn’t sufficient. Automated underwriting is the process where that loan officer uploads your file electronically to be evaluated by a computer program. This step occurs prior to a human underwriter reviewing the file. This is standard and required for all Qualified Mortgage loans (also called Agency loans) – the vast majority of all mortgage loans.

Most of the time loan officers can figure out what the computer program and thus what an underwriter will accept. Sometimes, the computer program spits out a result that is unexpected – Approve/Ineligible or Refer with Caution. What the loan officer is attempting to get is Approve/Eligible. I recently had one of these situations. Debt to income was within ratios, though high. Reserves were available – meaning cash left in the bank after closing. It was a 723 credit score with several 30 day lates MORE than a year ago that was tripping the Ineligible result. Well, what does one do?

First attempts are to modify the file to find out what the computer program will take and whether that’s acceptable to the client. Next attempts are to talk to fellow loan officers and underwriters to talk through the scenario. But, there’s another piece to this puzzle. I enjoy reading industry guidelines and learning what is “coming soon”. Well, Fannie Mae releases new automated underwriting periodically – what they call Desktop Underwriter (DU) or Desktop Originator (DO). I use DO and I read their latest release notes for version 12.0, months prior to its release on January 11, 2025. Two items in the notes spoke to me and my client’s ability to be approved (bolding is mine):

First-time Homebuyer

The presence of a first-time homebuyer on the loan application will now be considered a mitigating factor in the DU risk assessment. DU V. 12.0 research showed that loans where a borrower identified themselves as first-time homebuyers performed better than similar loans for borrowers that had previously owned a home.

Rent Payment Identification

DU currently only considers positive rent payment history using a 12-month asset verification report for first-time homebuyers purchasing a principal residence and requires the borrower to have a credit score

My client is a first time home buyer and does have a 12 months rental history of on-time payments. I found the “research” that Fannie Mae has done – essentially reviewing “like” closed loans in their data base, but differentiated between first time home buyer and repeat home buyer (ownership during the last 3 years) to be eye-opening. I found it interesting that first time home buyers are more likely to pay on time and not default. But, more importantly, I was hopeful that my client would be able to improve their lot.

In fact, once I confirmed that Fannie Mae had released the update, I immediately ran my client’s file through the new release with the end result we sought – Approve/Eligible.  This release follows logic, which isn’t always the case in the mortgage world.

Here are the notes Matt is referring to – Desktop Underwriter/Desktop Originator Release Notes DU Version 12.0

* I don’t know that I have to make this disclosure here, but I feel better having done so. “This is to give you notice that NEST REALTY GROUP, LLC (“NEST”) has a business relationship with GRAY FOX MORTGAGE, LLC. The owners / members of Nest own 100% of Nest Realty Affiliate, LLC which owns a 20% membership interest in Gray Fox Partners, LLC which owns a 49% membership interest in Gray Fox Mortgage, LLC.”

As I tell my clients – 1) this type of affiliate relationship is common practice in the real estate world, and 2) I’ve recommended Matt for nearly 20 years, well before the advent of Gray Fox Mortgage.