It’s Back to Basics for Mortgage Market

January 26, 2014
New lending rules

As of Jan. 10, a number of new requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act took effect. (Muharrem Aner, Getty Images / January 20, 2014)

Comic Bill Maher ends his weekly television show on HBO with a segment he calls “New Rules.” So allow us to begin the new year with a report on the nation’s “new rules” for obtaining a mortgage your new home in Chicago.

As of Jan. 10, a number of new requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act took effect. The main difference between the lending standards and Maher’s rules is that there is nothing funny about the new lending canons.

Indeed, they are no joking matter. Consumer Financial Protection Bureau Director Richard Cordray calls the new common-sense rules a “back-to-basics approach” to mortgage lending. “No debt traps, no surprises, no runarounds,” he says.

Here’s a brief rundown:

Qualified mortgage. Borrowers won’t be offered qualified mortgages, at least under that name. Rather, the term refers to loans that meet the requirements set down under the Dodd-Frank Act and enforced by the bureau.

Under the rules, lenders will not be liable should a borrower run into difficulty years after the mortgage was originated, as long as the loan met the qualified mortgage standards.

So, to protect themselves, lenders will be playing it close to the vest, making sure they meet the letter of the law.

But that doesn’t mean mortgages outside the rules will no longer be available. They will, though they are likely to cost more, in terms of interest rates and fees.

Ability to pay. Every lender must make a reasonable, good-faith determination that you can afford the mortgage before you take it on. Obviously, they can’t tell whether you will lose your job three years from now, or whether you or a family member won’t be struck by a major illness. But they must now look at your income and assets and weigh those against the monthly payments over the long term.

Ratios. The debt-to-income ratio on loans insured by the Federal Housing Administration cannot exceed 43 percent, down from 46 percent previously. But some lenders are likely to impose an even stricter limit.

At the same time, lenders can and will offer any type of mortgage they believe you can repay. And the new rules do not prevent lending to any borrowers with a debt-to-income ratio in excess of 43 percent.

Mortgage bankers, for example, can rely on the less-restrictive rules for loans backed by Fannie Mae and Freddie Mac, the two quasi-government entities that purchase mortgages from primary lenders. And smaller community banks can choose to keep their loans on their own books.

But no matter what rules your loan is written under, your lender must believe without a doubt that you can repay. And they must verify and document everything.

Down payments. Though much has been written about lenders now requiring a minimum of 20 percent down, the new rules say nothing about a minimum down payment. Consequently, loans with as little as 5 or 10 percent down still should be readily available.

Fees. To meet the qualified mortgage standards, upfront points and fees cannot exceed 3 percent. (A point is 1 percent of the loan amount.)

Loan limits. Though the qualified mortgage rules say nothing about the amount banks or mortgage companies can lend, separate changes announced by federal regulators have ratcheted down limits on government loans.

As of Jan. 1, FHA loans cannot exceed $625,000, even in high-cost areas, down from $729,750. As a result of lower maximum loan amounts, according to the National Association of Home Builders, the ceiling on FHA loans will decline by more than 20 percent in nearly 150 counties and from 40 to 50 percent in 17 counties.

Although there was plenty of hand-wringing about whether Fannie and Freddie would also lower their limits, their regulator, the Federal Housing Finance Agency, elected to hold the line for 2014. This means that either company can still purchase loans of up to $417,000 in most locations and up to $625,500 in high-cost markets.

But again, lenders in the so-called “jumbo” space can lend as much as they so desire.

Self-employed. People without verifiable W-2 income face much more of an uphill battle than they used to. Even with substantial net worth and a high credit score, they are going to have to jump through hoops to show they are mortgage-worthy. For example, where daily expenses are used to reduce taxable income on most self-employeds’ tax returns, these write-offs will be used against would-be borrowers by lenders, who will deduct them from income when computing debt-to-income ratios and your ability to pay.

Documentation. Lenders will dig deeper into validating your income, employment, credit glitches and expenses. How deep? One borrower had to report not only how much he was paying for his homeowners insurance policies on all his properties — not just the one he was trying to refinance — but was also asked to produce the cover sheet for each policy.

If you are not ready for this kind of intrusion into your financial picture, your application could be delayed for weeks until you can provide the proper proof.

This post was originally published on ChicagoTribune.com on Jan. 24, 2014.

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