If you’re ready to purchase a new home — there are rules recently put in place to help protect you from entering into a risky mortgage. While these new rules may seem like obstacles placed in your way to prevent you from your homeowner dreams — and the lending process has certainly become more restrictive — these newer rules are there to help you purchase a home you can both enjoy and keep. If you’re not sure you’re ready to buy, consider these guidelines:
Ability to Repay
Adjustable-rate mortgages with super-low teaser rates were among the worst contributors to the foreclosure crisis, as were no doc loans that allowed borrowers to purchase homes without proving their income or savings. These products are a thing of the past—and likely to stay that way. Under the new “Ability to Repay” rule, mortgage lenders must thoroughly evaluate every consumer’s financial fitness regardless of the type of loan for which they are applying.
You can expect them to scrutinize your income and assets, your employment, your debts and your credit history as well as expected costs for homeowner’s insurance, mortgage insurance and property taxes when determining your ability to meet the monthly payment obligation on a loan. In most cases, your total monthly debt payments cannot exceed 43 percent of your monthly gross income or you’ll be denied financing approval.
Documentation of all details is required. This means more paperwork and longer processing times, especially if you’re self-employed as a freelancer or own your own business. You’re now required to produce two years of personal and business tax returns as well as a profit-and-loss statement and balance sheet to prove your repayment ability.
Qualified Mortgage
In the opinion of the Consumer Financial Protection Bureau, safer mortgages are ultimately more affordable. The “Qualified Mortgage” rule eliminates features they have deemed unsafe, such as terms longer than 30 years, interest-only payments and negatively amortizing loans—those in which minimum payments don’t cover the interest on the mortgage, causing the balance to continue to grow.
Additionally, the rule prohibits lenders from charging upfront fees of more than 3 percent of the mortgage balance. These fees include title insurance, origination fees and points. Points are pre-paid interest, each equal to 1 percent of the loan amount, used to lower the interest rate on the mortgage.
Unqualified Loans
Lenders can still choose to offer mortgage products that do not follow these rules. However, because they will be considered unqualified loans, they cannot be sold to Fannie Mae or Freddie Mac, the two government-sponsored enterprises that buy about 70 percent of all mortgages from lenders on the secondary market. This means it is likely that few lenders will bother. If they do, consumers can expect to pay much higher fees and interest rates for the products offered.
If you’re ready buy and have questions, contact your real estate professional for further insight.
