A raft of new mortgage lending rules that went into effect this year change the way consumers borrow and pay back home loans. Designed to put behind us the irresponsible lending that disrupted the housing market and badly damaged the U.S. economy, the changes are designed to protect you from bad mortgage lenders and set clear standards for what a homebuyer or homeowner can afford (and should pay) for a mortgage.
The rules come care of the Consumer Financial Protection Bureau. Its director, Richard Cordray, said that consumers whose income, debts, or credit profile fall outside the rules won’t be stopped from getting a loan. Lenders can continue to use their own reasonable judgment when looking at a consumer’s ability to repay.
But lenders who go outside the standards lose some legal protection from consumer lawsuits, so it’ll be interesting to see which borrowers they’re willing to make those outside-the-box loans to.
Meanwhile, here’s how consumers are most likely to be affected by the CFPB rules, plus other recent mortgage market changes, like the lowering of the maximum size of FHA loans.
- Homeowners with solid income, lots of home equity, and excellent credit. If you want to borrow much less than your home is worth and have great credit and plenty of income to pay your monthly bills, you’ll easily meet the new standards.
- First-time homebuyers. Most FHA and many low downpayment loans will meet the new safe loan standards. Those with marginal credit or other impairments that raise questions about their ability to repay a mortgage will likely face the same hurdles they faced before the rule.
- Homeowners whose lenders don’t treat them right. If your servicer loses your payments, doesn’t answer when you write to ask questions, or forces you to buy expensive insurance you don’t need, things are looking up. The new mortgage rules set standards for posting payments and answering your questions promptly, and stop mortgage lenders from forcing you to buy insurance you don’t need.
- Homeowners who don’t like to shop around. In the past, lenders paid loan officers a bonus for pushing customers into higher-interest rate loans. Now, lenders can’t do that anymore. Plus, lenders who charge you more than 1.5% above the going interest rate will lose protection from lawsuits.
When you’re shopping, ask if you’re getting a “qualified mortgage” – that’s the official name for a loan that meets the new guidelines. You’ll know that your loan is amongst the safest for you and within 1.5% of the rate most people with good credit are paying.
With the added protections, and more stringent lending policies, come potential hardships for some people. The new rule could restrict lending by at least 10%, and higher than that in some regions, which can create some difficulties in our economic recovery, says Jeff Kibbey, primary legal counsel for Century Mortgage Co. The future of homeownership depends on greater access to credit. “Over the past 8 years, homeownership in the U.S. has decreased while many in the growing population have turned to renting instead of buying a home,” said NAR’s chief economist Lawrence Yun. “We need to ensure that good, creditworthy renters can someday have the appropriate access to credit so they can build equity through homeownership.”
So who stands to have a tougher time in the new lending environment?
- Minorities and modest-income Americans. Credit continues to be so tight that responsible buyers are having trouble attaining homeownership, Yun said. Homeownership among African-Americans has fallen to just above 43%, down from just under 50% in 2004, and African-American net worth has been cut in half due to higher unemployment and the foreclosure crisis.
- Owners and buyers of higher-priced homes in high-cost areas. If you’re buying or selling a higher-cost home, finding a mortgage can be costly if the home’s value is more than the FHA or Fannie Mae and Freddie Mac loan limits of $417,000 and $625,500 in the highest-cost areas.
- If your mortgage is greater than the limits, you (or your home’s buyers) will need a “jumbo” loan, which usually means a FICO mortgage credit score of 720 or better and putting as much as 20% down or buying private mortgage insurance.
- Middle-income Americans who fall outside the new guidelines. First-time homebuyers trying to purchase a $350,000 house aren’t going to have a lot of loan options if they can’t get an FHA or Fannie/Freddie guaranteed loan, predicts Bankrate.com senior financial analyst Greg McBride. Those with bigger bank accounts, say a homebuyer purchasing a $900,000 home, won’t have the same difficulties. That richer borrower is an appealing customer for related financial products so a bank is more likely to give him a loan that falls outside the new guidelines to land him as a customer.
- Single homebuyers. Dual-income households tend to have higher credit scores because they have a second paycheck to fall back on in a financial crisis. Restrictive mortgage lending standards favor higher credit scores, McBride said.
- Mortgage borrowers in Connecticut, Florida, New Jersey, and New York. Borrowers in those four states will pay 0.25% more to use Fannie Mae and Freddie Mac’s loan programs. The fee is being levied because foreclosures take a long time to process in those states, so the mortgage giants lose more money when they have to foreclose on homeowners there.
- Mortgage borrowers with fluctuating income who’ve had a bad year or two, including business owners, commissioned salespeople, or executives who didn’t get that big bonus. There’s a new emphasis on ability to repay and that starts with proving you have steady income, says McBride.
- Mortgage borrowers with lots of debt. If your car payments, student loans, or other installment debt take up more than 43% of your income, and you can’t qualify for an FHA or GSE loan, you won’t meet the new lending standards, so you may have a hard time finding a mortgage, McBride said.