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New Loan Requirements For Getting A Mortgage
The number of homes purchased with a home loan has been dropping steadily since May, according to RealtyTrac. Instead, cash is king for many reasons. As mortgage rates began creeping up, some homebuyers started opting to purchase with all cash. And that trend may continue as new loan requirements become more strict.
However, for those buyers who do need to purchase a home with a loan, expect to see some changes in the loan requirements as the new year rings in. Here are a just a few of the changes that are going into effect in January 2014. Some of these requirements are already in place by lenders.
The new guidelines are being implemented under The Consumer Financial Protection Bureau's Qualified Mortgage (QM) and are designed to help avoid the borrowing catastrophes that caused the housing crisis. The guidelines are what the lenders use to prove borrowers' ability to repay a loan.
One of the guidelines is borrowers must have a maximum debt-to-income ratio of 43 percent. Debt-to-income ratios have been in place but the new rules won't allow for any compensating circumstances. That means that not even a significant downpayment or a large cash reserve will be allowed to offset a higher debt ratio.
The incentive to follow these guidelines is huge for the lender. If the mortgages don't meet the QM guidelines then the lender will be required to hold the loan as opposed to being sold to Fannie Mae and Freddie Mac.
The QM requirements potentially may have lower loan limits for conventional conforming loans. The agency that regulates Fannie Mae and Freddie Mac, The Federal Housing Finance Agency, will delay it's normal adjustment of loan limits from January 1, 2014 to sometime later in the year. The agency is trying to see what kind of impact the new QM guidelines will have on the housing industry. For most housing markets, the current limits are $417,000 and up to $625,000 in high cost areas. How these figures will change remains to be seen in 2014.
Fee origination fees will be limited under the QM requirements which could make getting a smaller loan more difficult. Originating loan fees will be limited to no more than 3 percent of the loan amount. This could make mortgage lenders less likely to offer smaller loan amounts because they may not always be able to recoup their costs and make a profit.
The self-employed borrowers will also face tougher requirements with the new QM rules. These borrowers already face tough standards and they'll likely be even more strict in 2014. In the QM guidelines, all borrowers must prove there is sufficient cash flow to make payments on their loan but self-employed borrowers' incomes typically fluctuate. These borrowers frequently have cash reserves that they rely on to pay bills when the income is off in a particular month. However, even if there is a large amount of money in reserve, this may still be difficult for the self-employed borrower to get a loan approved due to this new "ability-to-repay" QM guideline.
Expect to see changes in the loan approval process as the new year begins. However, some of the specific requirements may not be determined until later in 2014.