Big changes are coming to the mortgage industry in 2014, and lenders will soon have to adapt to new mortgage rules that will offer borrowers further protection against abuses and reckless lending standards. But the changes may not please all borrowers.Regulations drafted by the Consumer Financial Protection Bureau will change the definition of a qualified mortgage for any loan applications received on and after Jan. 10, and many consumers may find themselves unable to meet the new requirements.
Qualified mortgages are loans that meet standards designed to ensure that borrowers have the ability to repay the amount in question. In return, lenders will be protected from borrower lawsuits so long as they issue "safe" mortgages that follow guidelines.
Facing this challenge, it's up to the hopeful homeowner to improve their chances of mortgage approval by doing the necessary research, improving their credit profiles and meeting the qualified mortgage standards well in advance of filling out loan applications.
It's important to meet qualified mortgage standards because government-sponsored enterprises, known as GSEs, like Fannie Mae and Freddie Mac have said they won't buy non-qualified mortgages starting next year. Fannie and Freddie don't lend to homeowners directly, rather they purchase mortgages from banks and then bundle them into securities and sell those securities to investors.
For lenders that originate mortgages with the intention of selling them to the GSEs, as many do, originating non-qualified mortgages won't be feasible. Other lenders own the mortgages they originate, meaning they don't have to worry about selling them to GSEs, and such larger portfolio lenders should continue to take on non-qualified mortgages.
What's Changing? Mortgages must pass tests of sorts to meet the standards of a qualified mortgage: The APR must be within 150 basis points (1.5% points) of the annual prime offer rate, the loan term cannot exceed 30 years, points and fees cannot exceed 3% of the loan balance and there can be no negative amortization or interest-only payments. Under these conditions, the mortgage qualifies for safe harbor, meaning the lender is not at risk of being sued by a borrower who is unable to repay the loan.
There's a class of loans called higher-priced qualified mortgages, in which the APR exceeds the 150 basis-point limit, and in those cases, the loan falls under rebuttable presumption, meaning the lender is assumed to have complied with ability-to-pay requirements, unless a borrower or attorney argues otherwise. Loans with rebuttable presumption will likely come at an additional premium, though the price of that premium is unclear at this point.
The ability to repay comprises a series of requirements that must be met by the borrower and verified by the lender, including income and debt levels. All of these CFPB regulations are aimed at protecting consumers from mortgages they can't reasonably expect to repay, because such faulty loans triggered the recent financial crisis and downturn in the housing market. Given these limitations, and some new restrictions on lenders that also go into effect in January, some have suggested that some consumers may find themselves struggling to acquire a mortgage.
Originating a mortgage has been a process that blends science and art. The science includes the regulations that give clear guidelines for what does and does not meet qualified mortgage standards. The art comes in when an originator decides to approve or deny a mortgage application, even if a borrower doesn't meet every requirement in the book, because his or her experiences can give important context to a case that numbers and rules cannot.
With this QM rule we're seeing an elimination of the art and a focus on the science. The way the points and fees will be calculated is now essentially a defined standard. My gut says because of the shrinking art component and the emphasis on the science, fewer people are going to qualify for loans.
While the new regulations are beyond consumer control, there are several things potential homeowners can do to prepare for buying residential property in 2014.
1. Ask Questions: If this all sounds a bit confusing, don't worry. You're not alone and there's confusion among lenders. For potential homeowners who don't understand what these changes mean for them, there's no shame in asking someone to explain them.
There are a lot of components to mortgages that first-time homebuyers may not be familiar with. Say a lender instructs you to reduce your debt-to-income ratio -- that is how much of your income is tied up in existing loan obligations, student loan payments, collections accounts, judgments, etc.
As mentioned points and fees can't exceed 3% of the loan balance, but what's a point and when should you pay them? A point, is prepaid interest on the loan, with one point equal to 1% of the loan. If a borrower would rather have a lower interest rate than the one they're offered then they can pay points to lower that rate.
Buying a home is a complex transaction and you're bound to have questions. No one should enter into such a large financial decision with uncertainty. Ask a lender to explain it to you, but understand that the lenders are nailing down the new processes, as well.
It's important to shop around for mortgages, and consumers should know that they should concentrate their mortgage search into a few weeks in order to minimize the impact on their credit scores. Inquiries are a major factor in your credit scores, and too many inquiries can hurt your credit. Every time a lender pulls your credit this is considered an inquiry. Mortgage inquiries made within that short period (which varies by credit scoring model) will count as a single inquiry on their credit reports, and because multiple inquiries would normally ding credit scores, this allows consumers to find the best offer without harming their credit profiles.
2. Tackle Debt: If you have debt, you should try to reduce it, and this is true for all consumers, not just those looking to buy a home. Would be homeowners, should be extra motivated to conquer their debt: Under new ability-to-repay requirements necessary to attain a qualified mortgage, a borrower's debt-to-income ratio must be 43% or less, including the potential mortgage payment.
Not only do lenders consider the debts that show up on your credit report, but also have to look at debts you may expect to pay in the future, such as child support and student loans in deferment.
Whether you're looking to buy a home next year or in two years, make a plan to manage debts now. It can only help.
3. Start the Paperwork: Though these new requirements impact consumers, they also affect lenders, and no one wants to be the first to screw up. The ability-to-repay measures require a lot of documentation, which will need to come from you, the applicant.
Lenders are going to need to get a very holistic perspective on the borrower in order to complete the analysis necessary to meet compliance. Borrowers should ask a lender exactly what documents they'll need to provide to complete the loan application. In order to answer lenders' questions, would be buyers should also take stock of their credit profile.
Consumers are entitled to a free annual copy of their credit report from each of the three major credit bureaus -- Experian, Equifax and TransUnion. That's three credit reports, so it's smart to review at least one before starting the homebuying process.
No one is sugar-coating these changes -- they're a lot to handle. Changes are common in this post-crisis climate, so the best consumers can do is ask questions and do their part to prepare and educate themselves. In the end, if lenders are making better loans, and the consumers are better protected, it's better for everyone.
If you, or someone you know is considering Buying or Selling a Home in Columbus, Ohio please contact The Opland Group. We offer professional real estate advice and look forward to helping you achieve your real estate goals!
The Opland Group Specializes in Real Estate Sales, Luxury Home Sales, Short Sales in; Bexley Columbus Delaware Downtown Dublin Gahanna Grandview Heights Granville Grove City Groveport Hilliard Lewis Center New Albany Pickerington Polaris Powell Upper Arlington Westerville Worthington
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