Lastest Mortgage Rules changes

The mortgage industry is constantly changing. Keeping up with the rules, even for a 20+ year experienced Mortgage Loan officer like myself is very difficult.  The following is a quick breakdown of recent changes for both potential home buyer or real Estate Agents to know:

FHA Loans with Collection and Charge Off Accounts on Credit Reports:

This is a big one. This new FHA rule is going to disqualify a lot of potential home buyers.  Your credit report is going to be even more important than ever before.  Under the old rules on FHA loans, old collections and charge off items did not have to be paid off or dealt with as long as your credit score was OK enough to qualify.  With the new guidelines, FHA is now requiring lenders to include estimated monthly payments on collection and charged off accounts based on 5% of the outstanding balance.

Adding a “mythical payment” of 5% of the balance will dramatically raise these buyer’s debt ratios, resulting in either significantly lower purchasing power, or potentially preventing some from purchasing a home at all.

No More 3% Down on Conventional Fannie Mae Loans:

Fannie Mae has been the last holdout for 3% down conventional loans, but they are switching to a minimum of 5% down.  Freddie Mac switched some time ago. Home buyers will now need at least 5% down payment. The 3% down conventional loan had been a very popular alternative to the 3.5% down FHA loan because of cheaper mortgage insurance and less stringent home condition requirements. Note, in MN we still can offer a 3% down conventional loan tied in with the MHFA Start Up down payment Assistance program.

Debt-to-Income rule change:

During the housing boom, lenders could allow debt ratios well into the upper 50% range.  After the housing crash, Fannie Mae and Freddie Mac dropped that to a maximum of 45%.  The Frank-Dodd Financial Reform and the Consumer Financial Protection Bureau laws are dropping that to a maximum of 43% starting in January 2014.

New Three Percent Rule:

Closing costs and Points paid by the borrower will not be allowed to go over 3% of the total amount of the loan. cfpb_logoWhat fees are included in the 3% have not been clarified. This rule may sound great on the surface – the government is protecting homeowners from lenders charging outragious fees – the reality is just the opposite.  This new rule will have a very serious effect on those looking for smaller loan amounts (typically under about $100,000). As a lender, we already have trouble with loans under $50,000, and this rule is just going to make it worse. A great example is an appraisal. Regardless if you buy a $40,000 home or a $400,000 home, the appraisal fee is the same. About $400 in my area (Minneapolis, MN). On the $40,000 home, that appraisal fee alone is a full 1% of the purchase price, while on the $400,000 home, it is only 0.1%.

Qualified Mortgage (QM):

More new rules because of the Frank-Dodd Financial Reforms laws, and the creation of the Consumer Financial Protection Bureau.  Lenders will be given “safe harbor” from homeowner lawsuits if the loan they provide you fits the more restrictive definition of a Qualified Mortgage.  They are still hammering out the final details of what a QM loan will be, but bigger down payments, lower debt ration quidelines, and more “proof” of income are just some of the items that will be in the final QM rule. The end result means more and more people will NOT qualify for a mortgage as lenders tighten guidelines even more to fit the Qualified Mortgage rules.  An article I just read said only 1 in 5 current loans would meet the new definition.

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