Getting a Mortgage is About to Get Harder

 

Starting January 10, 2014, the New Qualified Mortgage Rule (QM) will take effect to avoid the repeat of the housing and credit crisis happened 5 years ago. The new rule prohibits banks from approving mortgages to potential borrowers that have higher than 43% of debt-to-income ratio. It means that potential borrowers' total debt liability should not exceed 43% of income.

The new QM rule will make it more difficult for first time buyers to purchase their own home.  First time home buyers may have limited income or existing college loans.  This will result to 30 - 40% decrease in the total market. When this market is taken out of the equation,prices are going to be stagnant or decline. Stagnant or declining pricing means underwater home owners will stay in that position, encouraging short sales and foreclosures. 

Borrowers that do not meet the Ability-to-Repay (ATR) standard will likely see decrease in credit availability and increased in borrowing costs. In addition, borrowers with inconsistent income such as self-employed, contract workers, individuals with cyclical or seasonal employment, or those primarily reliant on investment income will likely have some difficulties satisfying the underwriting criteria despite good credit histories.  (Source: First Look - Implications of the ability to repay rule and the qualified mortgage definition)

Mortgage lenders are going to look sharply on (1) Current or reasonably expected income and assets, (2) Current employment (3) Monthly payments on covered transactions (4) Monthly payments on simultaneous loans (5) Monthly payments for mortgage related obligations (6) Current debt obligations alimony and child support (7) Monthly debt-to-income ratios or residual income and (8) Credit history.

Bottom line is... it will be harder for the potential home buyers to obtain a loan once the new rule takes effect due to the increased required documentation, higher down payments and stricter underwriting guidelines.  

As for the seller, if you want to sell quickly, that will not be happening for next year.  Currently, the average closing period is 45 days, it will definitely take longer once the new QM rule takes effect.

So, if you're shopping for a mortgage, it's a MUST that you close your loan before the end of the year.  It is important to ACT NOW! Not in a few weeks or a few months, but NOW!!! While lending policies are still manageable. Once the new rule takes effect it will be harder for both buyers and sellers to close transactions.

If you need to understand how and when the new regulations may impact you, don't hesitate to contact me. I can provide good tips and guidance to get through the mortgage process as smoothly as possible.