Here are a few questions you may have if you are thinking about applying for a home mortgage subsequent to the January implementation of the new guidelines.
What is a qualified mortgage?
Qualified mortgages were developed by Federal banking regulators in response to the housing market crash in 2007/08. The goal of a qualified mortgage is to reduce investor risk by creating a standardized and government sanctioned standard for approving Borrowers . New and old formulas determining a borrowers “ability to repay” or afford the loan will now be required in order for the borrower to obtain a prime interest loan. . A qualified mortgage carries stringent lending requirements in terms of credit and financial solvency. Lenders not meeting these standards will be subject to increased risk of litigation and assumed liability.
What is so important about a qualified mortgage?
Government-sponsored enterprises like Fannie Mae and Freddie Mac have stated that beginning next year, they will only purchase qualified mortgages from lenders. Neither Freddie Mae nor Freddie Mac extends loans directly to borrowers; rather, they purchase mortgages from initial lenders for sale to investors – an attractive proposition for lenders wishing to sell. This incentive for lenders to provide qualified mortgages will have an impact on loan requirements seen by prospective homebuyers.
What are the new standards for qualified mortgages?
Under the new guidelines due to go into effect in January, the term on a qualified loan may not exceed 30 years. The annual percentage rate (APR) must fall within 1.5 percentage points of the annual prime offer rate, and points and fees may not be in excess of 3% of the loan. Additionally, there can be no interest-only payments on the loan.
If I’m looking to apply for a mortgage, what does this all mean for me?
The new regulations are designed to protect consumers from buying into mortgages that they can’t reasonably expect to repay. Lenders are going to scrutinize mortgage applicants’ finances more closely than in the past, especially debt-to income ratio and credit standing. The bottom line is that it’s more imperative now than ever to be organized and have finances in order well before entering into the mortgage application process. Here are a few steps you can take to get the ball rolling:
· Limit inquiries into your credit if possible. In other words, try not to apply for multiple loans or credit cards, within four months of searching for a home.
· If your credit isn’t stellar, take the time to shore it up by being careful to make all payments on time in the past 12 months and by following up in writing with the various credit bureaus to make sure inaccuracies are removed from your credit record.
· Pay down your debt. If you have balances on credit cards or open accounts, try to pay them off. In order to be approved for a qualified mortgage, your debt-to-income ratio must not exceed 43% -- and keep in mind that this percentage must include your new monthly mortgage payment.
· Educate yourself. Talk to a loan originator that’s experienced. Ask about the financial documentation you will be expected to provide during the application process, and start gathering it. Expect that it may include a significant amount of paperwork.
· Get started. Get preapproved in advance of looking for a home, so you’re confident and ready to go when the right home is found.
While these new loan requirements may seem intimidating, they are designed to protect consumers from getting in over their heads on mortgages that are too large to handle. In the end, the homebuyer is protected from purchasing a loan beyond his or her power to repay, and the lender reduces risk of loan defaults and litigation. The new standards recall an earlier era, prior to the housing boom and subsequent bust, when home ownership was within reach, but required financial diligence and responsibility.