In a move that could up-end traditional mortgage lending, mortgage giant Freddie Mac will soon start to approve loans, in part, by considering an applicant’s bank statement cash flow.
Starting November 6, 2022, lenders will be able to submit 12 or more months of bank statement information to Freddie Mac in order to push a mortgage applicant from “denied” to “approved.”
This is an industry-first move for standard lending, and nothing less than an all-out effort to spur homeownership among first-time buyers, especially underserved ones.
“Our latest innovation levels the playing field,” said Terri Merlino, Freddie Mac Single-Family senior vice president and chief credit officer, “and helps make homes more accessible to borrowers whose lenders might not have qualified them with traditional methods of underwriting.”
If you’ve been denied in the past, but have solid cash flow history, it’s a great time to re-apply.Check your Bank Statement Cash Flow Program eligibility.
How cash flow analysis helps first-time homebuyers
For many, traditional lending is broken.
It’s based on analyzing “inside-the-box” borrowers, with solid W-2 income, plenty of money in the bank, and 800 credit scores.
But plenty of people could make their mortgage payment even if their scenario isn’t as “clean” on paper.
For instance, say you have sporadic income and a lower credit score but there’s always money in your bank account. You have no trouble paying your bills each month. You regularly deposit a certain amount into savings.
Freddie Mac, with the applicant’s permission, will pull such signals directly from banks and pull them into its computerized approval system called Loan Prospect Advisor, or LPA.
This system factors in hundreds of data points to ultimately tell the lender whether Freddie Mac will accept the loan. Only positive signals from bank statements will push many applicants over the line into “approved” territory. Negative signals will be ignored.
Keep in mind that the lender will still look at debt-to-income ratios and will need to verify income. It will not be able to approve a loan based on bank statements alone at this point. Rather, it will use bank account history as a compensating factor when other loan details are not as strong.
Freddie Mac’s Merlino says, “With the addition of positive monthly cash-flow data, our underwriting system can help with more accurately predicting a borrower’s ability to pay their mortgage, because it uses a comprehensive view of how personal finances are managed over time.”
How to access the Freddie Mac Bank Statement Cash Flow Program
Many lenders across the U.S. can approve loans based on Freddie Mac guidelines.
Freddie Mac isn’t a lender itself; it only makes rules for lenders to follow. You can access the program by choosing any Freddie Mac-approved bank or mortgage company. Simply ask the lender if they are a Freddie Mac lender.
If so, this feature will automatically be available starting November 6, 2022.
Another thing to note is that this is not a program itself, but a feature incorporated into all Freddie Mac loans. So whether you’re buying or refinancing, choosing a 30-year fixed, or adjustable-rate mortgage, or applying for some other loan type that Freddie Mac offers, you can access this feature.
Accessing the Freddie Mac Bank Statement Cash Flow Program
- Apply with a Freddie Mac-approved lender.
- Supply typical loan documentation like pay stubs and W2s.
- Give the lender permission to pull 12 months’ bank account information directly from the bank. Lenders use 3rd-party vendors to securely access your bank account history.
- Ask the lender to submit all 12 months of banking history to Freddie Mac’s computerized system, Loan Prospect Advisor (LPA) after November 6, 2022.
LPA will then automatically pull in and analyze your bank balance history. It will generate a decision. If approved, the lender can issue you a pre-approval and you can shop for a home.Submit your application for the new Cash Flow program.
Re-apply after November 6, 2022 if you were denied
If you recently applied to buy a home but were denied, apply again with the lender soon. You could even apply a few days before the November 6 bank statement cash flow program introduction.
If you have a loan application in process, or plan to apply soon, simply have the lender run your scenario again on or after November 6. In many cases, the file could change from “denied” to “approved.”
Because there are hundreds of factors that go into a computerized underwriting system, it’s impossible to predict who will achieve a different approval status. The only way to know is to have the lender re-run your scenario in LPA as soon as the system switches over to the new model on November 6, 2022.
A new day for first-time and underserved buyers
This new way of looking at loan applications is surprisingly forward-looking, especially from a member of the mortgage lending old guard like Freddie Mac.
It’s a sign of the times, for sure. Even stoic mortgage giants like Freddie Mac and Fannie Mae are coming around to the fact that many people are locked out of homeownership due to antiquated approval processes.
This could be a new generation’s ticket to owning a home, especially those who don’t fit inside a neat box, but nonetheless have proven trustworthy to pay bills, save, and manage personal finances wisely.Apply for the Bank Statement Cash Flow program even if you’ve been denied in the past.