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. 

 

 

The New 43% Loan Cap in Qualified Mortgage Rule

Getting approved for a mortgage loan has become so difficult as compared to few years back, prior to the housing collapse.  However, Federal regulators are issuing more new lending rules that could possibly make it harder for both existing and potential borrowers to obtain loans.  Effective January 10, 2014, Consumer Financial Protection Bureau (CFPB) will implement the new Qualified Mortgage (QM) Rule. The new QM rule will require new borrowers to have a debt-to-income ratio (DTI) not exceeding 43.

The new lending rules will limit potential borrowers from taking out a mortgage or refinancing an existing one that puts their overall household borrowing at more than 43% of their income. The Debt-to-income cap of 43% means that all the debt expenses (this includes total mortgage payment) do not exceed 43% of the borrower's gross income (income before taxes). That new debt cap also includes a wide swath of common forms of debt that count toward the total, including student loans, most fees and points related a home purchase, and property taxes. It also tightens rules on documentation, and lenders who improvise to give customers easier terms will be open to consumer lawsuits if the loans go bad. (Source: http://money.usnews.com/money/personal-finance/mutual-funds/articles/2013/08/20/fewer-easy-mortgages-under-us-consumer-agency-rules)

The following groups may be affected by the new Qualified Mortgage rule:

- First time home buyers, especially those who are carrying college loans.  College loans will be counted towards the 43% debt-to-income cap.
- Home owners that want to refinance but lost their equity due to the housing bust.
- Retirees with limited savings.

The new credit restrictions can result to a more expensive, harder-to-arrange loans or outright disapproval for qualified borrowers.

With mortgage interest rates on the rise, increase in house prices and combined that with tightening credit standards, how can a average Joe afford the American dream of owning his own house?

If you want to own your new home, NOW is the time to act! In 4 months, the new Qualified Mortgage rule will take effect and acquiring a home may be more expensive and more difficult by then. If you want to take advantage of the more relaxed rules and buy your new home, please feel free to contact me.

The New Mortgage Rules To Protect The Borrowers And The Lenders

The Consumer Financial Protection Bureau announced the "Qualified Mortgage" rule last Thursday, January 10. The new home-lending standards are designed protect the would-be borrowers from mortgages they can't afford and in return, grant the lenders some protection against lawsuits by borrowers who claim they shouldn't have been granted a mortgage in the first place. The new rule will also determine what type of loans can be extended by the banks and to whom. The new rule is a result of the 2010 Dodd-Frank Act, which is meant to help prevent the the return of the lending practices that resulted to the crash of the housing market in 2007-2010.  The new rules will take effect in January of 2014.

The housing crisis was brought about by the banks' willingness to lend without proof of income or without regard to overall indebtedness.

The "Qualified Mortgage" rule states that a borrower's monthly debt service should not exceed 43% of pre-tax income.  This rule will protect the would-be borrowers from the mortgages they can't afford,  For more details, check out this video, http://video.cnbc.com/gallery/?play=1&video=3000140442.  People who make enough money for their daily expenses may have a hard time qualifying for a mortgage..  It means that some people living in high-cost areas will not be able to buy a house of their own.

The upfront fees cannot exceed 3% of the loan.

'Exotic' mortgages like interest-only loans that don't require principal payments, loans carrying balloon payments, loans where principal increases over time and loans with 30-year term will not be considered for the "Qualified Mortgage" rule. (Source: www.forbes.com)

If the loan meets all criteria, lenders won't have to fear a lawsuit from the borrower.

Holden Lewis, a senior mortgage analyst at Bankrate.com predicts that, "Here’s what will change as a result of this rule: The next time there’s a housing boom, this rule will prevent lenders from losing their heads and, in the heat of competition, relaxing lending standards too much."

Debra Still, chairman of the Mortgage Bankers'Association said that, "We believe the rule will effectively block the return of risky product features and inadequate documentation.  If it also provides lenders the certainty needed to originate qualified mortgages broadly across the market to creditworthy borrowers, it will have been a success."

However, the effectiveness of the new rule is yet to be seen.   For the full documentation of the new "Qualified Mortgage" rule, please refer to http://www.housingwire.com/sites/default/files/editorial/201301_cfpb_ability-to-repay-summary%283%29%281%29.pdf