Mortgage reform is kicking in on Jan. 10, bringing significant changes to home loan financing.
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 eight 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 percent 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 percent of all new mortgages, the Federal Housing Finance Agency says.
Winners and losers
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 percent 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 percent, 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.