Getting a mortgage is about to get harder
New mortgage rules are going into effect Jan. 10 to protect homeowners and investors from the kinds of risky mortgages that led so many people into foreclosure.
This post comes from Marilyn Lewis at partner site Money Talks News.
The new rules were written by the Consumer Financial Protection Bureau to protect homebuyers from risky mortgages like the ones that led so many homeowners into foreclosure in recent years. The rules also protect investors from buying shoddy mortgage-backed investments.
The downside for consumers is that the rules make it harder for some people to qualify for a home loan. So, if you're shopping for a mortgage or refinancing right now, it's a good idea to close your loan before the end of the year.
In fact, though, many banks and mortgage lenders already are playing by the new rules.
The Ability to Repay Rule requires lenders to evaluate your financial fitness to repay a loan, even if it's an adjustable-rate mortgage with low payments compared with a fixed-rate loan.
Remember the "exploding" adjustable-rate mortgages sold to buyers who could afford the initial low teaser payments but lost their homes when the interest rates jumped a few years later? And do you recall the "no doc" mortgages, which let you borrow without proving how much money you have or earn? Those days are over.
Now, lenders will have to evaluate your ability to pay back a mortgage based on these points:
- Your income or assets.
- Your employment.
- The monthly payment on the mortgage you want.
- Monthly payments on your other debts.
- Monthly payments on other mortgage-related costs (home and mortgage insurance and property taxes, for example).
- Any commitments for child support or alimony.
- What's left every month after you've paid your debts. In most cases, your total monthly debt payments can't exceed 43% of your monthly gross income.
- Your credit history.
The Qualified Mortgage Rule defines a category of loans that are safest for consumers. These will be most affordable.
"If you are a borrower getting a qualified mortgage, your loan cannot contain certain features that often have harmed consumers in the past, such as excess points and fees," says the CFPB.
For example, no more:
- Interest-only mortgages, where you paid for decades without ever establishing ownership in the home.
- Negative amortization mortgages, which dug you deeper in debt as time went on.
The new rules apply to Fannie Mae and Freddie Mac loans, which make up nearly 70% of all new mortgages, the Federal Housing Finance Agency says.
Your application will have an easier time of it if you can show paycheck stubs with a steady work history and you file W-2 tax forms. "It gets difficult when you have a history of job changes, job loss or inconsistent income from self-employment," Mortgage Bankers Association president David Stevens told MSN Real Estate.
Wealthier borrowers with lots of savings and investments will have the advantage, qualifying for loan options and prices not available to most Americans. MSN Real Estate says:
(Stevens) predicts that borrowers will need a minimum credit score of about 750 to get a lower-cost conventional mortgage with a smaller down payment. On the other hand, even applications with some wrinkles already have easier sledding with down payments of 20% or more.
The changes make it harder for lower-income borrowers because they're less likely to be able to save for a down payment or to have consistent employment that pays well. And they're more likely to depend on income from other members of the household -- friends or family members under the same roof, making it complicated to apply for a mortgage.
There will be some exceptions to the rules, however, for low- and moderate-income homebuyers working with nonprofit lenders, according to Inman News.
What you can do
- Move quickly. If your debt load is greater than 43%, consult with several lenders. Find out if you can qualify under the old rules and, if so, if there's still time to get a mortgage closed before the end of the year.
- Pay down debt. If you can’t move that fast, start paying down your debt so that you can qualify under the new debt-to-income standard.
- Try other routes. Mortgages insured by the federal government will have somewhat looser requirements. They'll also be increasingly more expensive. If you're having trouble meeting the new requirements, ask your lender whether you might qualify for a VA, FHA or USDA mortgage.
Are you trying to get a mortgage before the Jan. 10 changes take effect? Tell us about it.
More on Money Talks News:
The CFPB created by DoddFrank Act is going to "protect" the people by alleviating all potential risk involved in the transaction - which is easily done by just excluding a substantial percentage of the population from participating in home ownership - which this does. Of course, these same people have no upside potential and will forever be renters buying homes for the wealthy. Talk about the rich getting richer - it will happen by Obama's own design.
Obama is creating two classes of people, on purpose, and with their approval.
Talk about the Dumbing Down of America.
Great! Create a system where there is no upward mobility except for those with pre-existing capital.
Philisophically Obama and the liberals want to control the outcome of the game (redistribute points as necessary) rather than create a system equal to all players and then let a person's own committment and ambition control their personal outcome without government interference. Huge difference.
I've been waiting for a unit in this very nice townhome complex to come available and one finally did, after a couple years....I've had my realtor auto-monitor it. I was ready to pay full price and a down payment of 20% and more if necessary. My job is secure, I have zero debt, excellent credit score, mortgage payment to income below 15%, but the banks only want cash on this because the rental percentage is too high in the complex, so an investor picked it up to rent it. Hmmm.....they have other loans in that complex already, but they would rather an investor pick it up and rent it out. I didn't strive for years to get out of debt and maintain an extremely high credit score to be turned down because of this. My long track record shows that I'm not going to run away from the mortgage payment.
They wouldn't even look at my credit score, salary or negotiate a higher down payment......just flat no to anyone that doesn't have a cash offer. Investors are going to make a fortune in this market, since they control it now.
I too see the mixed messages that MSN is sending. One day they report its easier, the next its getting tougher. No wonder people don't know what to believe.
If you want the facts, you should talk to a local mortgage professional you trust. They are the "boots on the ground" and have to deal with the new rules and guidelines everyday.
As someone who has been in the business a long time and seen the massive changes, I will say it will be tougher in 2014 for some people to qualify. The "quality mortgage" rule is only one reason why. The agencies such as Fannie Mae and the big banks like Chase and Wells will react, tighten guidelines and what they call "overlays", additional rules for their underwriters, on all mortgages they agree to buy from smaller banks and mortgage brokers. If you got a mortgage a few years ago and seek on in 2014, you will be surprised at how much more documentation is required and how much work a borrower has to do to get their mortgage funded.
That being said, the mortgage market reacted to the meltdown long before Congress passed Dodd-Frank and created the new super agency, the Consumer Finance Protection Bureau. The CFPB will now regulate almost everything financial in the country and will certainly use its power to justify its existence.
I think we can all agree that not everyone is well suited for home ownership, a long term commitment that requires financial stability and discipline. The push to make everyone a home owner that started under President Carter forcing Fannie and Freddie Mac to relax guidelines and accept subprime loans into their portfolio did not work. Our home owner ship rate has fallen back to where it was in the 70's. Being a renter is not a mark of a bad person, its just a better housing solution for some people than ownership.
Bottom line is if you think you are going to seek a mortgage in 2014, gather all your documents and go see a local mortgage lender. They should be able to tell you in a few minutes if you could qualify and what, if anything else you need to do before you start looking at homes.
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