Looking to buy a new home this year? If so, you better brace yourself for stricter home loan requirements in effect for 2014 compared to what’s been seen in recent years. You can blame the bursting of the housing bubble for new rules designed to keep borrowers out of hot water. Regardless of the intent, the process has become more complicated and some potential homeowners may find themselves giving up on a home purchase for the foreseeable future.
The new changes, which were put into place by the Consumer Financial Protection Bureau, can be loosely categorized as:
The rules addressing the prospective borrower’s ability to repay are primarily tied to the debt-to-income ratio. Lenders will be looking for a ratio below 43 percent. Unlike in years past, there will be few exceptions to the rule because doing so will greatly risk the lender’s ability to resell the loan. Be sure to get your financial house in order before stepping foot in the lender’s office.
Changes that fall under the “qualified mortgages” category relate to safeguards being put in place to ward off predatory lending practices and other actions that take advantage of borrowers by extending loans that are beyond a borrower’s ability to repay.
If you already own your home, keep in mind that the new rules also spell out the steps a lender has to make to attempt to help you return a past-due account to a personal one.
Other changes you can expect to see involve more clarity in your mortgage bill and other communications from your lender. Deadlines for response to your inquiries are more precisely spelled out.
Home buyers and the mortgage industry alike are playing under a new set of rules and face more strict home loan requirements in effect for 2014. The new playbook is the government’s attempt to avoid another housing market meltdown. But stricter requirements could catch consumers off-guard, possibly locking some out of home ownership altogether.
In announcing the new rules, the Consumer Financial Protection Bureau announced it is taking what it describes as a “back to basics” approach to home lending, an approach designed to reduce the risk of foreclosure and default.
Among the changes, the bureau is asking mortgage lenders to comply with two new rules: the “ability to repay” rule and the “qualified mortgage” rule. Mortgage lenders are unlikely to ignore the new requirements, since doing so risks being locked out of the secondary mortgage market.
Gone are the days of quick loan turnaround and minimal paperwork. The ability to repay rule requires lenders to conduct a thorough review of a borrower’s income and assets to ensure he or she has the ability to make timely payments throughout the term of the loan.
One very critical measure is the debt-to-income ratio. This calculation is done using a potential borrower’s monthly debt divided by income.
The lender will include the highest potential mortgage payment the borrower would make over the course of a potential loan. This point is important because it is meant to safeguard against lenders using teaser rates or other breaks given to borrowers early in the life of the loan when attempting to come up with a qualifying debt-to-income ratio.
The lender will also include other monthly debt, including student loans, credit card payments and car loans, as well as housing costs, utilities and other recurring monthly expenses. These will be added up and then divided by a borrower’s gross monthly income.
The bottom line is that lenders are going to want borrowers to have a debt-to-income ratio below 43 percent. While there may still be a small amount of wiggle room—some lenders may bend things a bit for those with an impressive portfolio of assets—for the most part, 43 percent will be the standard to live by.
The real teeth in the new ability to repay rule come from the requirement that lenders document and verify the applicant’s income, assets, debt and credit history. That means potential home owners should be ready to hand over current paycheck stubs as well as bank statements, while also expecting thorough reviews of their employment and credit history.
The net result? Borrowers can look forward to much more paperwork—and much longer approval times, with some finding they are turned away.
The point of this rule is to sidestep risky practices of the past, such as mortgage terms extending beyond 30 years, interest-only payments or minimums that aren’t keeping up with interest—so-called negative amortization schedules that cause a mortgage balance to grow rather than shrink.
Also on the chopping block? Upfront fees and charges that add an amount more than 3 percent of the mortgage balance. These might include:
Any practice that gives financial incentives to mortgage brokers or loan officers who steer borrowers into high-interest loans they can’t hope to afford—thought to be one of the primary causes of the bursting housing bubble—will also be a no-no under the new rules.
Some changes to mortgage lending practices designed to avoid another crash of the housing market target existing loans. Beginning this year, lenders are required to contact any homeowner within 36 days of missing a payment. Any loan workout options must be provided within 45 days after a payment is missed.
At that point, lenders must help connect their customers with a point of contact for customer service. A homeowner who decides to pursue “loan workout” options must be given the information necessary to apply for potential repayment assistance. While lenders are not required to agree to a loan repayment plan for resolving an issue, they must respond to the borrower within 30 days of receiving such applications.
A lender can still pursue foreclosure once a payment has been late for 120 days if a homeowner has not taken the steps necessary to resolve the payment issues.
Other new home loan requirements for 2014 are likely to be welcomed more warmly by potential home owners. For example, mortgage lenders are now required to provide borrowers with a monthly billing statement that clearly spells out which portion of the monthly loan payment goes toward escrow and what counts toward the principal, as well as the current balance owed and any service or transaction fees that have been charged.
Those with a fixed rate mortgage and accompanying payment book will likely only notice a bit more detail added to their monthly statement.
Another new safeguard in place is that lenders are now required to credit a borrower’s account the same day funds are received, whether regular monthly payments or additional payments, and they must respond to consumer inquiries about loan payoff information within seven days of receiving the written request.
Likewise, if a borrower writes a lender with a concern or question regarding an existing account, the correspondence should be acknowledged within five days. From that point, they then have 45 days to address the inquiry and inform the borrower of the action.
The new requirements do not pertain only to fixed rate mortgages. Lenders must send notice of an increased interest rate to consumers with adjustable rate mortgage (ARM) loans 210 and 240 days prior to the first payment date, providing details about the new payment amount under the new rate. In addition, another notice must be sent 60 to 120 days prior to the new payment’s due date.