Great news for all mortgage seekers: Fannie Mae and Freddie Mac unveiled rules which could open the mortgage market to people who have not-so-impressive credit score.

Here are some of the changes:

  • A third-party arbiter, not the two government-chartered agencies, will decide on a disaccord between the lender and Fannie Mae or Freddie Mac.

  • The two mortgage loan firms pledged not to force lenders to repurchase a loan unless the borrowers committed a fraudulent act or failed to give his payment for two straight periods.

  • The agencies expanded the definition of fraud, as well as clarified the penalties for any errors found in underwriting.

Let’s revisit the previous rules. Fannie Mae and Freddie Mac are two entities instituted by the US Congress that are responsible for fulfilling the dream of every American to own a house and ensuring liquidity and stability in the mortgage market. They do not lend money and provide any estimate on potential home purchase.

A lender’s primary objective is to sell the loan to any of the two agencies in the secondary market when financing an upcoming home purchase. By doing so, the lender removes the mortgage from their books, frees up money, and generate profit on the loan. But here’s the catch: Fannie Mae and Freddie Mac are two of the most eager loan chasers in the market. Hence, lenders only approve a mortgage application if they believe the two companies would buy it. Do not expect lending firms to look at the terms of retaining the loan.

However, a housing crisis, which coincided with the US recession between 2007 and 2009, changed the industry’s landscape. Fannie Mae and Freddie Mac can pressure them to buy back the mortgage in the event of discrepancy. If the agencies cannot force banks to repurchase a poor loan, the latter can incur penalties.

As a result, the underwriting standards have been elevated. Lenders will dig into your financial capacity and they won’t extend a mortgage to those who do not meet such standards. Why? Lending entities do not wish to take the risk of reselling the loans to the two federal agencies or other buyers in the secondary market.

Do you consider buying a house? Perhaps now is the right time. Thanks to the eased restrictions over the last few years, securing a financing is made easier for everyone.