Navigating the New Mortgage Market
If you’re planning to buy a house next year — and unless you’re able to make an all-cash offer — you could be impacted by changes that have just taken place in the mortgage application process.
Several federal agencies have adopted policies aimed at addressing lax underwriting standards that led to the housing market crash more than five years ago. Those new policies could make a difference in how much you can afford to borrow.
Few could argue with the ultimate goal. The policy changes require lenders to better verify that borrowers can afford the homes they’re looking to buy and can make their mortgage payments.
Other changes are intended to protect borrowers while holding lenders more accountable for their business practices, which came under critical scrutiny following the financial debacle.
For example, one set of rules requires mortgage servicers to provide borrowers with accurate, monthly information about their loan balances and to correct mistakes quickly.
Servicers are also prohibited from starting the foreclosure process until 120 days after the borrower’s last payment, and after a loan modification request has been evaluated.
“By bringing back these basic building blocks of responsible lending and servicing the customer, we will improve conditions for consumers seeking to enter the market and for all those who are still struggling to pay down their existing loans,” said Richard Cordray, director of the Consumer Financial Protection Bureau, in a prepared statement last December.
“By making the mortgage market work better, we will build consumer confidence and strengthen this essential foundation of our economy,” he added.
Another big change primarily affecting 70 high-cost regions — that designation does not include Central or Northeast Florida — is a Federal Housing Administration (FHA) plan to decrease the maximum loan amount for borrowers in those areas from $729,750 to $625,500.
Locally, however, those maximums are unchanged. In Orange, Seminole and Osceola counties, borrowers can still get an FHA loan up to $274,850. In Duval, St. Johns, Clay and Nassau counties, it’s $304,750.
Borrowing more than that means applying for a jumbo loan, which typically mandates a down payment of 20 percent instead of the modest 3.5 percent some FHA loans require.
Those limits, by the way, only apply to single-family homes. For condominiums, duplexes and other types of housing, the limits are different.
Also in January, the Consumer Financial Protection Bureau implemented a new set of rules designed to address the kind of predatory lending practices that spurred a wave of foreclosures in recent years.
Authorized by the Dodd-Frank Act, the “Ability-to-Repay” regulations are aimed at preventing lenders from approving mortgages for borrowers with questionable credit scores and poor debt-to-income ratios, and steering those high-risk borrowers into adjustable-rate loans or interest-only loans with little or no money down.
The housing crisis was spurred in part when rates on ARMs were reset upward. Millions of homeowners lost their properties in foreclosure because they could no longer afford to make higher monthly payments.
Better news for borrowers is that the new rules will cap loan origination fees at no more than 3 percent of the amount for mortgages of $100,000 and above.
Currently, loan origination fees are not capped. However, as a practical matter, most lenders keep their fees low enough to attract customers yet high enough to make a profit.
The “Ability to Repay” rules also establish a standard for what the government considers a “qualified mortgage.” Risky mortgages — negative-amortization, interest-only or balloon-payment loans — fall outside the qualified-mortgage standard.
Borrowers who end up defaulting on their loans will now have the ability to sue lenders who don’t exercise proper due-diligence — including rigorous income verification — prior to the loans being made.
Another provision requires borrowers’ debt to total no more than 43 percent of their gross income. However, lenders would still have flexibility to make exceptions for buyers with excellent credit scores, significant assets or other extenuating circumstances.
Although Fannie Mae and Freddie Mac won’t buy unqualified mortgages, lenders can still make such loans if they choose to keep them in their own portfolios, adds Cordray.
Still, some experts say that borrowers seeking conventional mortgages meeting Fannie Mae and Freddie Mac criteria may face higher fees.
In fact, the agencies announced in December that guarantee fees they charge to lenders for servicing their loans will rise an average of 14 basis points on 30-year fixed-rate loans, on top of the 10 basis point increases in 2011 and 2012.
Since lenders indirectly pass on the cost of paying the guarantee fees, the change could have a negative impact on consumers’ ability to borrow, particularly if they are already brushing up against the 43 percent ratio.
The fees charged to consumers, which used to be roughly 11 to 13 basis points, are now they are about 50 basis points. A basis point equals 1/100th of 1 percent, so 100 basis points would be equal to a 1 percentage point change in an interest rate.
Your best bet: work with a realtor, lender or mortgage broker who has your interests at heart and displays a thorough understanding of the new rules and how to navigate them.
IN SUMMARY
Here’s how the new mortgage-finance rules might impact your ability to buy a home — and the kind of home you buy.
• FHA Loan Limit Decrease: Buyers in high-cost areas who need to borrow more than $625,500 will be unable to use FHA financing and must apply for a jumbo loan (the amounts are considerably lower in Central and Northeast Florida). Typically, that means instead of making a down payment of 3.5 percent, borrowers will be required to make a down payment of at least 20 percent.
• Ability-to-Repay/Qualified-Mortgage Rule: Borrowers without a lot of debt won’t be affected by this new rule, but those who have a debt-to-income ratio above 43 percent will find it harder to qualify for a loan unless they can reduce their debt or boost their income. Self-employed borrowers will need to provide more documentation of their income, and all borrowers will be required to provide extensive paperwork to prove their income and assets.
• Caps on Loan Origination Fees: Lender fees will be limited to 3 percent of the loan amount, which means borrowers won’t be overpaying for their loans. However, the cap on fees may make lenders less likely to offer smaller loans, say some experts.
• Rising Guarantee Fees: Lenders are likely to pass on higher fees that they pay to consumers, which will add to the cost of borrowing. That’s in addition to rising interest rates, which many experts are forecasting will reach at least 5 percent next year, which remains low by historical standards. Still, some see an upside: Higher rates may mean fewer loan applications in 2014. Tight competition among mortgage companies for a smaller pool of applicants could mean that lenders will loosen their standards a bit and make it easier to qualify.
• New Mortgage Servicing Rules: Mortgage servicers will be required to provide each borrower with a monthly statement that clearly shows their interest rate, loan balance and escrow account balance and an explanation of how their payment is being credited. Lenders will be required to credit mortgage payments on the day they are received. “Dual tracking” will no longer be allowed, which means that no foreclosure proceedings can be started until a borrower is at least 120 days late and has completed a loss mitigation application that has been reviewed by the lender.
IT’S NEW FOR YOU
WHY SETTLE FOR A FIXER-UPPER WHEN A NEW HOME DOESN’T COST ANY MORE?
If you think your first home has to be somebody else’s fixer-upper, think again. You can likely buy a new (or almost new) home with all the modern bells and whistles — and not spend any more per year.
Using data from the Census Bureau and Department of Housing and Urban Development’s (HUD) 2011 American HousingSurvey, NAHB found that a newer home — even a more expensive one — can cost the same or less per year to own and maintain than an older home with a lower up-front price tag.
NAHB’s study first looked at how utility, maintenance, property tax and insurance costs vary depending upon the age of the structure. It found that homes built before 1960 have average maintenance costs of $564 per year, while homes built after 2008 average $241 per year.
Similarly, operating costs average nearly 5 percent of the home’s value for pre-1960 structures, while they average less than 3 percent when the home was built later than 2008.
The study then compared the first-year, after-tax cost of owning newer and older homes, taking into account the purchase price, mortgage payments, annual operating costs and income tax savings.
This data showed that a buyer can pay 23 percent more for a new home than for a home built before 1960 and still maintain the same first-year costs.
In other words, although mortgage payments may be slightly higher for a new home, operating costs will be lower, meaning the outlay is about the same for a higher-priced new home than for a lesser-priced older home.
Other benefits of new homes include open-space floorplans, creative storage options and entertainment resources that cater to modern lifestyles. Plus newer homes are far more energy efficient, many built to certified green standards.
Of course, NAHB’s study compared more expensive newer homes with less expensive older ones. That isn’t always the case; in today’s market, depending upon the neighborhood, many comparable newer and older homes cost roughly the same at the outset.
In other words, although mortgage payments may be slightly higher for a new home, operating costs will be lower, meaning the outlay is about the same for a higher-price new home than for a lesser-priced older home.