Understanding the New Mortgage Writing Rules and What They Mean for You
When the housing bubble burst in 2008, there was finger pointing about who was responsible. Some people blamed consumers, who took out loans they couldn’t pay back on homes they couldn’t really afford. Some blamed the banks, which wrote loans to nearly anyone who walked through the door.
Regardless of where the blame truly lies ó and in truth, a number of factors caused the housing collapse at the end of the last decade ó the housing economy is rebounding. Home values are at their highest point since 2007 (although not nearly as inflated as they were) and interest rates are still near all-time lows. Many potential home buyers are returning to the market, this time armed with more information and a more realistic view of what is affordable and what isn’t.
While home buyers are more willing to get back into the real estate game, banks aren’t necessarily more willing to lend money. Buyers expecting the easy money of a decade ago are going to find that being approved for a mortgage ó not just pre-approval, but an actual approved loan ó requires jumping through more hoops than ever before. Beginning January 1, 2014, several of the provisions of the Dodd-Frank Act of 2010 take effect, in an effort to both curb the abuses that led to the housing collapse and keep home buyers from taking out loans they cannot pay back.
Can You Prove It?
In the early 2000s, it was relatively easy to get a loan. Many banks simply took applicants at their word when they claimed assets and income. Lenders touted no-doc or low-doc loans as a means to simplify and speed up the lending process.
That is no longer the case. Under the new rules, lenders must have proof that you can repay the loan. That means calculating your debt to income ratio, which in general must be 43% or lower. This includes all of your expenses ó including the maximum amount you would be required to pay on the loan, which was not always included in the past. You must provide official documentation of all of your debts and assets, as well as your credit history. There is also no longer a federally mandated minimum credit score requirement in order to qualify for a home loan, but most lenders still require a score of at least 660.
These new rules are part of the government’s new laws requiring that all mortgages be Qualified Mortgages. While applicants now have to prove they can repay the loan, the bank must adhere to certain rules as well. Mortgages can no longer be longer than 30 years, be interest-only or require inadequate monthly payments that do not reduce the principle. In addition, up-front mortgage fees can no longer add up to more than 3 percent of the total loan amount.
Investors Face More Hurdles
While the changes for the average home buyer are getting the most attention, the new mortgage rules also affect real estate investors. A few of the changes include:
- Federal Housing Administration loans, which generally offer low down payments that appeal to investors looking to flip a property or use it as rental income, now have lower maximums. For example, in Florida, the maximum loan amount dropped from $417,000 to $285,000. This means that higher-value properties will require a larger initial investment.
- Down payment minimums for all types of loans for investment have increased across the board. The minimum is now generally 25 percent down.
- Caps on mortgages are limiting the amount of real estate you can pay off at one time. Don’t expect to be able to use the equity in your existing properties to secure a mortgage for a new one or to refinance a loan. Most banks have put limits on the number of mortgages that one person can hold, even if they have perfect credit and plenty of assets. In most cases, you will no longer be able to hold any more than four mortgages at one time.
Many mortgage lenders point out that they have already been adhering to the Qualified Mortgage and Ability to Repay rules for some time and that very few loans actually did not meet the QM standard. However, for anyone who plans to apply for a mortgage for the first time, or the first time since before the economic collapse, preparing for these new requirements will prevent a great deal of frustration and disappointment.