A couple of important rules went into effect at the beginning of January that may affect your ability to obtain a loan to buy a house. Two of the more important changes apply to borrowers’ ability to repay the mortgage and what types of loans lenders can offer. While some people may view these changes as simply applying some common sense to the process of obtaining a mortgage, the genesis of the changes is from the housing crisis when common sense was not very common.
The first important change is the requirement for lenders to verify the borrowers’ ability to repay the loan. Essentially this is simply looking at a person’s income relative to their debt payments. If the amount of debt exceeds certain ratios, the likelihood of not being able to repay the loan increases. Emphasis is placed on verifying a person’s income sources with greater scrutiny and requirements for documentation. This leads to people who work a lot of overtime obtaining additional proof from their employers as well as self-employed individuals providing more evidence of their income sources.
In addition, the debt payment calculation is different, especially for adjustable rate mortgages which have variable interest rates after a certain period of time. The ability to repay calculation must be done based on the highest possible interest rate in most cases, not just the initial interest rate which is often much lower. This change was introduced to minimize the risk of higher payments after the initial term resulting in foreclosure.
The second major change affects the features of loans to meet new guidelines for “Qualified Mortgages.” These safe harbor provisions provide some protection to lenders if the borrower later defaults and tries to blame the lender for making unsuitable loans. Some of the eliminated features include interest-only payments and mortgage lengths that exceed 30 years. In addition, certain fees and points paid up front are limited to 3 percent of the loan amount.
While the changes will prevent some people from obtaining mortgages, the new rules help to make sure people are only buying homes they can truly afford as well as limiting some of the predatory lending practices common in the past decade. It’s also more important now than ever to obtain a fully underwritten pre-approval letter before making an offer to purchase to make sure you can buy the house of your dreams.