If you’re thinking of buying a home or refinancing, new federal rules governing mortgage lending in 2014 probably have you wondering: Will the new rules make getting a mortgage more difficult? Is there any reason to borrow before 2014?
Well, next year, “most borrowers won’t find it any more difficult” to get a mortgage than they do right now, says Keith Gumbinger of mortgage data site HSH.com. That’s because ever since the credit crisis, lenders have tightened standards, rejecting applicants with shaky income and bad credit.
Still, rules are rules. When the new Consumer Finance Protection Bureau rules take effect, borrowers will be evaluated by those standards.
However, Clifford Rossi, a University of Maryland finance professor, notes that amendments to the rules are possible, as the CFPB and lenders study their impact on housing and borrowers.
Mortgage seekers should stay informed about their chances for the loan they want, starting with this primer on the new rules.
Focus On Affordability
The nation’s current foreclosure crisis is the impetus for new CFPB rules. The government wants to ensure that homeowners don’t get mortgages they can’t afford.
So, the CFPB researched what affordability means for most households. The new rules, which will take full effect in 2014, require that a borrower’s total recurring monthly debt stay below 43 percent of the borrower’s pre-tax monthly income – otherwise, the mortgage is deemed unaffordable.
Monthly debt includes student and auto loan payments, credit card obligations, mortgage payment, property tax and homeowner insurance.
However, there will not be a total ban on mortgages where debt is more than 43 percent of pay. Those mortgages are still considered qualified “for a temporary, transition period,” according to CFPB literature, but only if the loan application is approved by government-backed mortgage firms Fannie Mae or Freddie Mac.
With the focus on affordability, will credit scores, which for years have played a major role in determining whether a borrower is eligible for a certain loan, still matter?
“Lenders will still rely on scores,” Gumbinger says, but because “private firms supply scores, and the government didn’t want to endorse one.”
Lenders will use credit scores and other factors like the amount of down payment to determine whether they want to grant a loan and at what terms.
Typically, borrowers with marred credit are charged a higher interest rate. But finance professor Rossi says he’s worried that lenders will shy away from making higher-rate loans to those with weaker credit, because under the new standards, lenders are exposed to greater legal liabilities if borrowers go into foreclosure on these loans.
Although Rossi emphasizes that the ramifications of the new rules are not known, he also worries that some borrowers in high-cost housing areas may have trouble getting “jumbo” mortgages, which are more than $417,000, with the threshold higher in some areas.
For instance, a borrower with excellent credit may not get a jumbo mortgage because his total debt exceeds the 43 percent ratio. “But the reason the debt ratio is high is because he’s taking on a big mortgage,” Rossi says. “Especially in coastal areas, where home prices are high, this could hold back [housing sales].”
With one exception – mortgages made by community banks or credit unions in mostly rural areas – the rules ban “balloon payment” mortgages. These loans come due after a short period, like five years.
Balloon payment mortgages are considered a valid solution for these rural areas. “There are really no comparable [home-sale figures] for a home that might be on 30 acres with five or six out-buildings,” explains Ron Haynie, vice president of the Independent Community Bankers Association.
It’s been the practice for community lenders to hold these loans and then the loans are re-negotiated with the borrower when the payment period ends, Haynie says.