Vail mortgage column: New mortgage guidelines will help borrowers
When it comes to getting a mortgage, myths and urban legends abound. To be fair, though, it’s nearly impossible for any consumer to keep up with the ever-changing requirements for getting a loan.
For the majority of the past 10 years, it’s seemingly become harder and harder to qualify. Indeed, in the early 2000s, about the only requirement was that a borrower had to be able to fog a mirror and sign an X for his or her signature. This was followed by several years of increasingly draconian standards.
Now, the pendulum is swinging the other way, and borrowers are catching breaks on several fronts. Most notably is a new limit on how much of the borrowers’ income can be spent toward their housing payment and other minimum monthly obligations.
Debt to income ratio
In the recent past, borrowers were limited to less than 45 percent of their gross, pretax income going toward their housing, car, credit card and other loan payments. That means if someone made $10,000 per month before taxes (and met all other requirements), then they could get approved for a max payment of their home loan and other payments up to $4,500 per month.
Starting in July, Fannie Mae and Freddie Mac (who end up funding more than 95 percent of the residential mortgage market) have said they will accept a 50 percent debt to income ratio, meaning that in the above example, the borrower could qualify for a larger loan amount than before.
Exactly how much depends on a number of factors unique to each borrower, including their other debts, credit score, down payment or equity and property type and occupancy. But when all is said and done, more people will qualify for larger loan amounts and that is a good thing for the real estate market.
Another recent development is a reduction in the requirement for appraisals. Fannie and Freddie have long dreamed of building an automated valuation system that will do away with the need to do an appraisal for each loan. They hope to do this by compiling data on millions of homes and millions of sales to statistically guess what a home is worth. To varying degrees, this idea has been around for the past 15 years at least, but the agencies now think they have got it right and hope in the near future a large percentage of loan applicants will get the requirement waived.
Less fresh data from new appraisals
On the one hand, that would speed up the process by a couple of weeks and save consumers a pile of money. But on the other hand, there is no way for a database to know that your home is the coolest place ever or to know you spent $100,000 this past year putting in new bathrooms and a kitchen while your neighbor’s house that sold at a substantial discount had orange shag carpet and lime-green countertops. In addition, as the current pool of data ages, it will become even more inaccurate because there will be less fresh data from new appraisals being added.
The good news is that the borrower will know shortly after a loan application if the database has assigned a sufficient value to the property, and if not, then there should be time to get a real appraisal, which will be happily accepted. I think appraisers still have some solid job prospects for some time to come. But you can expect to see a lot of ads on TV for mortgage lenders insisting that no appraisal will be required; don’t buy into it, particularly in our very diverse market.
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage-related questions from readers. His website and blog can be found at http://www.mtnmortgageguy.com.
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