Mortgage procedures to change during 2014
October 24, 2013
What’s ‘debt to income?’
For the purposes of determining mortgage eligibility, “debt to income” adds the cost of a total home loan payment — which includes principal, interest, taxes and insurance — as well as any the minimum payment on any other loans. That includes student and car loans, as well as credit card debt. Those payments are then calculated as a percentage of a borrower’s income.
EAGLE COUNTY — Buying a home may get a bit more difficult starting in January of 2014. The result may be more buyers paying more interest and losing the relative security of a fixed-rate mortgage.
The new rules, instituted by the federal Consumer Finance Protection Board, will require Fannie Mae and Freddie Mac, federal agencies that repurchase the vast majority of home loans from originating lenders, to secure only "qualifying mortgages." To qualify, a borrower's total credit debt can't exceed 43 percent of his or her income. Right now, those debt-to-income ratios have some wiggle room. That won't be the case after the new rules take effect.
Borrowers who can't meet the 43 percent requirement will still be able to get mortgages from "portfolio lenders," but those loans won't be sold to the federal repurchasing agencies.
So, what's a portfolio loan?
Chris Neuswanger, a longtime local mortgage broker said portfolio loans are generally held by banks as investments, and aren't re-sold. Lenders sell most of their mortgages to either Fannie or Freddie, which then frees up lenders' capital to write more mortgages. Since the portfolio loans are kept by investors, Neuswanger said those mortgages carry slightly higher interest rates. Those loans are also rarely fixed for 30 years, as most conventional mortgages are.
Portfolio loans also require a down payment of between 20 and 30 percent. Ultimately, a conventional mortgage is a much better deal.
Sarah Jardis, president of Central Rockies Mortgage in Avon, said the new rules will make buying a home more complicated for some people. The rules could also make it trickier for people to buy a second home if they're looking for mortgage financing.
While a lot of people who buy in the "luxury" end of the market pay cash, Jardis said a number of those buyers look for financing when rates are low. Financing frees up money for investment elsewhere, presumably with rates of return that exceed the costs of borrowing.
The new rules also require a good deal of documentation, Jardis said.
"I now need every page of every financial statement," Jardis said. "That doesn't sit well with borrowers."
While the new rules might be an inconvenience for luxury home buyers, the effects could be more serious for those who want to buy their first second home or their first home.
The new rules may also affect people who are self-employed, Neuswanger said.
"It will impact someone right on the cusp," he said. A debt-to-income ratio of 43.5 percent could push someone into a portfolio loan."
With the new rules coming, Neuswanger encouraged people shopping for a new home to get pre-qualified now, or to start to take steps to learn their current debt-to-income ratio before shopping for a home loan.
"It might be a good idea to review your 2013 taxes with a lender before you file," he said. "And some self-employed people may want to cut some deductions if they want to buy a house."
While the new rules may make lending more difficult, there's still some good news.
Jardis, who's been in the local mortgage business since 1995, said current requirements are about what they were a decade ago, before the days of "sub-prime" mortgages that fueled the national housing boom and subsequent bust.
And, Neuswanger said, there are still mortgages available with little or no money down for borrowers who meet the new debt-to-income requirements.
Even portfolio loans aren't necessarily a bad thing, and Jardis said there's more money available in that market than there was a couple of years ago.
"Lenders see a better opportunity for return now," she said.
Ultimately, Neuswanger said he doesn't see the new rules making too much of a dent in people's ability to get loans.
"I think there's more smoke than flames," he said. "But people affected need to plan for it."