Home Loan Changes for 2014

For those who are planning to purchase a home this year please note that there are some home loan changes that are going into effect starting this month, January 2014.  Some of those changes are noted below.  AS ALWAYS, CHECK WITH A MORTGAGE LOAN OFFICER.....I am definitely not a loan expert.

The new guidelines are being implemented under The Consumer Financial Protection Bureau's Qualified Mortgage (QM) and are designed to help avoid the earlier borrowing issues that caused the housing crisis a few years ago. The guidelines are what the lenders use to prove a borrowers' ability to repay a loan.

One of the guidelines’ requirements is that borrowers must have a maximum debt-to-income ratio of 43 percent (until this year it was 45 percent).  Debt-to-income ratios have already been in place, but the new rules won't allow for any compensating circumstances.  For example, putting down a significant down payment or a large cash reserve will not offset a higher debt-to-income ratio.

The incentive for a lender to follow these guidelines is substantial.  If the mortgages don't meet the QM guidelines, the lender will be required to hold the loan as opposed to selling it to Fannie Mae and Freddie Mac.

The QM requirements potentially may have lower loan limits for conventional conforming loans.  The agency that regulates Fannie Mae and Freddie Mac, The Federal Housing Finance Agency (FHFA), will delay its normal adjustment of loan limits from January 1, 2014 to sometime later this year.  FHFA is waiting to see what kind of impact the new QM guidelines will have on the housing industry.  For most housing markets, the current limits are $417,000 and up increasing to $625,000 in high-cost areas.  How these figures will change remains to be seen in 2014.

Origination fees will be limited under the QM requirements and this could make it harder for borrowers to get a smaller loan.  Origination loan fees will be limited to 3 percent or less of the loan amount.  This could make mortgage lenders less likely to offer smaller loan amounts because they may not always be able to recoup their costs and make a profit.

Tougher standards also await self-employed borrowers in 2014.  In the QM guidelines, all borrowers must prove there is sufficient enough cash flow to make payments on their loan but self-employed borrowers' incomes typically fluctuate.  These borrowers frequently have cash reserves that they rely on to pay bills when their income is during a particular month.  However, even if they have a large amount of money in reserve, it may still be difficult for the self-employed borrower to get a loan approved due to this new "ability-to-repay" QM guideline.

This may lead to changes in the loan approval process as the new year continues to unfold in 2014.

While qualifying is a little tougher, the sales prices are still LOW and the interest rates are still LOW, so it is worth the effort to go through the lending process to get a home now... and it will only get harder as we move forward... prices and interest rates are both likely to go up.