There are two new mortgage rules that are going into effect in 2014. Both of these rules will highly effect how mortgage banking is done today.
Below is an explanation of the two rules. The first is the “Ability to pay.” This will force bankers to use a buyer’s total debt to calculate their debt-to-income ratio or DTI and not solely their property debt. The second is “Qualified Mortgages.” This will put an end to aggressive loan types such as 40-year products and interest only loans.
According to a close associate of mine from Wells Fargo, “This will affect about 30% of my clients. Also about 15% of the people I lent to last year would not be able to receive financing under these new policies”.
Currently, we have a very strong demand in the NYC market. But if we see a 15% drop in buyer supply I would predict a strong slowing of the market and a flattening in prices.
I spoke with a high level contact at Bank of America who said that their bank is working on products and methods that will take the place of loans that they will no longer be able to supply.
Personally, I like the government looking for ways to protect against foreclosures and short sales. But I believe this plan is too blanketed and it is not well thought out. There needs to be a better strategy that does not handcuff borrowers who theoretically should be qualified. It would make sense for the government to do a survey to see how many buyers’ who purchased a mortgage over the past 10 years would now not qualify and see how many subsequently faulted on their loans. Would that number be above or below the national average?
Ability to Repay
- Lenders must determine that a borrower has the income and assets to afford to make payments throughout the life of the loan. To do so, the lender may look at your debt-to-income ratio, which is how much you owe divided by how much you earn per month, including the highest mortgage payments you would be required to make under the terms of the loan. To calculate your debt-to-income ratio, add up all your monthly obligations — including student loan, credit card and car payments, housing costs, utilities and other recurring expenses — and divide it by your monthly gross income.
- In an effort to put an end to no- or low-doc loans, where lenders issue risky mortgages without the necessary financial information, lenders will be required to document and verify an applicant’s income, assets, credit history and debt. For borrowers, that means more paperwork and longer processing times.
- Underwriters must also approve mortgages based on the maximum monthly charges you face, not just low “teaser rates” that last only a matter of months, or a year or two, before resetting higher.
- To make sure you aren’t taking on more houses than you can afford, your debt-to-income ratio generally must be below 43%. This rule is not absolute. Banks can still make loans to people with debt-to-income ratios that are greater than that if other factors, such as a high level of assets, justify the risk.
- Qualified mortgages cannot include risky features, such as terms longer than 30 years, interest-only payments or minimum payments that don’t keep up with interest so your mortgage balance grows.
- Upfront fees and charges cannot add up to more than 3% of the mortgage balance. That includes title insurance, origination fees and points paid to lower mortgage interest rates.