More Difficult to Get a Mortgage in 2014

More Difficult to Get a Mortgage in 2014

It will be more difficult to get a mortgage in 2014.  Don’t panic!  There will still be lenders who will make loans to qualified house buyers that may have some “challenges”.  I can help you find a lender who will work with you and get you approved!

The Way Things Were:  In the “olden days”, a home buyer would borrow money to buy a house from a bank.  The bank got the money to make mortgage loans from deposits that it took in.  If the bank needed more money to lend to house buyers, it would pay a higher interest rate on deposits to entice more people to make deposits. 

Government Intervention:  The Federal Housing Administration “FHA” is a United States government agency that was created as part of the National Housing Act of 1934.  The FHA insured loans made by banks and other private lenders for home building and home buying.  The goals of this organization are to improve housing standards and conditions, provide an adequate home financing system through insurance of mortgage loans, and to stabilize the mortgage market.

In 1938 the Federal National Mortgage Association, Commonly known as “Fannie Mae” was established to create additional funds for mortgage loans by selling mortgage backed securities.  The government sponsored the creation of the Federal Home Loan Mortgage Corporation (FHLMC) aka “Freddie Mack” in 1970.  Click Here to learn more. 

Lending Guidelines: 

In the olden days:  In the days before the FHA, Freddy and Fanny, the banks had lending guidelines that they followed to help determine the credit worthiness of the would be home buyer.  The lending guidelines were set by the bank to help insure against making bad loans that may go into default. 

Today:  Banks make loans using the FHA, Fanny and Freddy guidelines.  By adhering to the FHA, Fanny and Freddy guidelines the bank is assured that they will be able to sell the loan to the FHA, Fanny or Freddy. 

How Loans are Made:  Step 1.  Banks make loans to house buyers based on “FHA, Fannie and Freddie guidelines”.  If the buyer meets the FHA, Fannie and Freddie guidelines the bank making the loan knows that it will be able to sell that loan to the FHA, Fannie or Freddy.  Step 2.  Once the loan is made to the buyer the bank sells the loan to the FHA, Fannie or Freddie so that they will have more funds available to make additional mortgage loans.  Step 3. The process starts again. 

The government is now implementing more stringent lending guidelines.  As a real estate broker, I am pleased to see more restrictive lending guidelines.  While this may negatively impact my business in the short term, in the long term I believe that more stringent lending guidelines will strengthen the housing market. 

What do you think?  Leave a comment below. 

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Eight reasons why it will be harder to get a mortgage in 2014
By Jennifer Berry | Yahoo Homes – Fri, Oct 18, 2013

Don’t let the eight new criteria mandated by the Dodd-Frank Mortgage Reform take you by surprise when it’s time to apply for your home loan.

One of the after-effects of the recent financial crisis is the passage of the Dodd-Frank Mortgage Reform. Once the changes come into effect in January of 2014, it might be harder for you to qualify for a mortgage.

Let’s take a closer look at eight factors you’ll need to consider to qualify for a loan once the reform goes into effect in January.

1. You’ll need enough income or assets to cover your mortgage payments.

It’s probably pretty obvious why your income is something important for lenders to look at when determining how much you can afford to borrow – and it’s something lenders have been taking into consideration for a long, long time.

“If you go back to the beginning of mortgage lending, you had what we call the ‘Four Cs’ of traditional lending: capacity, cash, credit, and collateral,” explains Hollensteiner.

“The Dodd-Frank Act is very much a literal explanation of those. So when we talk about the borrower’s ability to repay the obligation, it’s all about the borrower’s capacity,” Hollensteiner says. By capacity, he’s referring to the borrower’s income or assets and whether it’s sufficient enough to make the monthly mortgage payments.

2. You’ll have to prove employment – or income from self-employment.

One of the surest ways to guarantee income is to have a job. So, this is another pretty obvious thing for responsible lenders to ask potential borrowers about.

“This is as important today as it has always been,” Hollensteiner says. “Do you have a position that will be here tomorrow? We can’t predict the future, but if a lender finds out a borrower’s job will expire prior to the loan closing, that might cause the lender to reconsider the borrower’s profile.” Without another job lined up, a lender could worry you might not be able to pay the mortgage.

Where this gets a bit trickier is when it comes to self-employed borrowers. If you’re an independent contractor, your jobs might only last a few weeks or months – and that could make it hard to convince lenders you’re a safe bet.

“Self-employed borrowers have to show a two-year track record of having been in the same business, along with two years of federal tax statements to show their income,” Hollensteiner says.

If you’re self-employed and thinking about applying for a mortgage, it might benefit you to talk to a mortgage professional to find out what you’ll need to prove your income.

3. You’ll need to prove you can afford property tax and homeowner’s insurance.

In addition to principal and interest payments on your mortgage, you’ll also have to pay property taxes, homeowner’s insurance, and possibly additional fees like a homeowner’s association (HOA) fee. The Dodd-Frank Act wants all of those taxes and fees to be clear to borrowers up front.

“Lenders need to document every payment associated with the property and what it entails,” says Hollensteiner. “It’s important for the consumer to know what the total payments are for the property.”

4. You’ll have to factor in the amount you pay on any additional mortgages.

This factor applies to homeowners who might take out more than one loan on their home, like a second mortgage or a “piggyback loan.”

The Dodd-Frank Act simply requires lenders to include both payments (for the first and second mortgage, in this example) when they’re figuring out whether or not a borrower is qualified for a loan.

Believe it or not, some lenders previously weren’t including the payment on the second mortgage in their calculations – even though it’s money the borrower will be expected to pay every month.

5. You’ll need to provide full disclosure of any additional properties you own.

Do you own a second home somewhere? If so, all mortgage-related costs for all of your properties should be included in a lender’s calculations to determine if you qualify for a new mortgage under the new reform.

“This would pertain to any properties the borrower owns. Investment properties, second homes, vacation homes, etc,” says Hollensteiner. “The lender needs to have full disclosure to the total monthly obligations on all the borrower’s other properties.”

6. If you pay child support, you’ll have to calculate that in, too.

Maybe you don’t have a second property, but you do have to pay alimony or child support every month.

That will also be taken into consideration, as lenders will be required by law to include things like alimony and child support in their calculations. Although the Federal Housing Administration takes this factor into consideration already, it may not be common practice across all lenders.

“The borrower might qualify based on income and debts alone, but monthly alimony payments could have a major impact on their being able to pay,” says Hollensteiner. “If the lender doesn’t include those obligations, the lender could be helping the borrower get financing that he or she won’t be able to continue paying down the road.”

7. You’ll need a debt-to-income ratio that’s lower than 38 percent.

One of the major tools lenders use to determine whether a borrower qualifies for a new loan is the debt-to-income (or DTI) ratio.

“The monthly debt-to-income ratio calculations have been in the lending industry for – probably forever,” says Hollensteiner. “What we’re seeing today in the industry is that the maximum DTI range is 38 to 41 percent of the borrower’s gross monthly income.” That’s the highest DTI lenders typically consider when determining whether or not to qualify someone for a mortgage, Hollensteiner explains.

To calculate your DTI ratio as a percentage (which is how lenders typically consider DTI ratios), divide your monthly debt repayments by your gross monthly income (before taxes), and multiply that number by 100. But why is the DTI ratio so important?

“It validates you’ve got a loan that meets the definitions of a safe loan,” says Hollensteiner.

8. You’ll need a clean credit history, and a good credit score.

You probably know that your FICO credit score can be used for everything from determining what interest rate you’ll pay on your credit cards, to whether or not you qualify for financing on that new car loan. It should come as no surprise, then, that it’s important to lenders, too.

“Going back to the ‘Four Cs’ of traditional lending, credit has always been considered,” Hollensteiner says. “It is tremendously important, and it is a great indicator of how likely the borrower is to repay the obligation.”

So it might be worth getting a hold of your credit report and doing whatever you can to improve your score. Pay your bills on time, every time. Dispute any errors on your report. A little effort now could pay dividends down the road when it’s time to apply for your mortgage – that’s how important your credit history is.

As Hollensteiner notes, “even in the dark ages of business, every lender – even if they didn’t look at anything else – looked at a credit report.”