Real Estate Roundup: New home loan requirements ensure repayment
Real Estate Roundup
Some of the final provisions of the Dodd-Frank Act of 2010 quietly took effect on Jan. 10 of this year. Developed to ensure that lenders actually verify an applicant’s financial information, the Qualified Mortgages and Ability to Repay regulations pressures lenders to review salary, job history and other debts. In short, the provisions are intended to make sure borrowers are able to repay home loans.
Based on the Dodd-Frank Act, the new regulations were actually issued by the Consumer Financial Protection Bureau and are designed to prevent the types of risky loans that contributed to the financial crisis. Starting Jan. 10, lenders will be required to scrutinize eight types of financial information about a buyer, including income and debts. In addition to written proof of earnings, lenders will also be required to assess a borrower’s other financial obligations, such as alimony and child support, debt-to-income ratio and credit history.
For many borrowers, these changes won’t feel all that different, as many lenders have changed their practices since the financial crisis and already follow many of these requirements. More requirements will be experienced if the lender chooses to provide a “qualified” mortgage, which requires loans to meet three additional measurements:
Points and fees cannot exceed 3 percent of the loan amount (although higher percentages are allowed if the loan amount is less than $100,000).
Loan term cannot exceed 30 years.
A borrower’s debt-to-income ratio cannot exceed 43 percent.
An exception to this requirement comes into play if the loan is eligible to be purchased by Fannie Mae or Freddie Mac, or to be insured by other government agencies. In this instance, the debt-to-income ratio does not apply, under a provision set to run until 2021.
Lenders don’t have to make qualified mortgages, but they receive certain legal protections if they do. Worried about legal repercussions, many lenders say they will only make qualified loans. According to Richard Cordray, director of the Consumer Protection Bureau, the vast majority of loans made in today’s market would meet qualified mortgage requirements.
What can a local buyer interested in purchasing a home do to improve their experience?
First and foremost, get in touch with a local lender and begin your loan process. Make sure you provide all financial information promptly, so the lender may submit your file for processing. Pay stubs, bank statements and tax returns are a few of the items needed, and you’ll need paper copies. In this day and age of computers and online information, sometimes “real” copies are harder to obtain.
Buyers should also be realistic in their expectations. Consider a payment you are comfortable with; not necessarily the largest one for which you might qualify. It’s no fun to experience an emergency — medical with those ever-larger deductibles or a car breakdown — and have no room in your budget for both the unexpected bill and your mortgage payment.
Although loan interest rates are roughly a percentage point higher than the all-time lows of last year, they are still incredibly lower than the double digit rates of the 1980s. The rate for a 30-year fixed conventional loan in early January was about 4.7 percent, while the 30-year FHA rate was about 4.45 percent. Although economists vary on how high and how fast interest rates may rise, they all agree that an improving economy means the increases may continue. As interest rates rise, buying power decreases, unless income also rises. Roughly, a one percent increase in interest rate decreases buying power by approximately $25,000.
One advantage to local first-time home buyers is the ability to apply for a USDA Rural Development loan. The program offers 100 percent financing in designated rural communities, and assists home buyers who may have some funds saved for a home purchase, but not quite enough to obtain a conventional or FHA loan. While Garfield County continues to be approved for such loans, most of Mesa County has been eliminated due to increasing population.
All in all, even with the new regulations and somewhat higher interest rates, it’s still a pretty good time to shop for your very own home.
Linda Hansen is a broker/owner with Real Estate Out West of Rifle.
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