Elgin, IL – Where’s the mortgage? When CNN’s article posted from January 2014, http://money.cnn.com/2014/01/10/real_estate/mortgage-rules/index.html on the new mortgage rules ,I was wondering how it might impact local buyers. Sure enough, the new restrictions have leveled the playing field this year. I found the low inventory was less of an impact than buyers unable to secure financing this summer.
The two big points from last January were trotting out someone’s ability to pay and making qualified mortgages.
Foreknowledge of one’s ability to pay is a bit ridiculous. Most people are not independently wealthy and work for a living. If their job is downsized, so is their income, hence their ability to pay is removed.
No lender can possibly tell if a person will pay back a 30 year mortgage, starting on Day One. So, of course, there is a lot of guesswork that goes into the process, starting off with debt-to-income ratios, which according to the article 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”. This means that whatever your current bills are, the bank has to see it through their lens of “this will never change”. Hence, if your ratios are not on par now, get them there fast. Keep in mind that it is ok, in bank terms, to be seen as making steady payments on student loans and rent (good debt) instead of running up huge credit cards or other unsecured loans. Pay Day loans are a no-no.
Mortgage lenders also are seeking to make qualified mortgages. While I am sure businesses do not try to make bad loans on purpose, mortgage lenders seek to reduce the number of lemons by combing through more data on a person’s salary history, income levels, debts and rules like 43%.
As noted by Les Christie, CNN’s article:
- “To make sure you aren’t taking on more house 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.”
Jumbo loans are run a bit differently, as noted by One Mortgage’s Steve Smither. According to Steve, jumbo loans (those over $417K) afford an even higher debt to income ratio. Different lenders have separate guidelines for jumbo loans because lenders normally don’t bundle and sell jumbo loans. However, if the lender expects to sell the loan, they will look for at least 20% down payment. Requirements for credit scores are typically much higher as are the requirements for reserves (6-12 months cash held in reserve). Steve also notes that interest rates can be dependent on the individual bank, with variances as much as a quarter point or higher. Also, he notes that jumbo loans can still qualify for Fannie and Freddie Mac low interest rates if your lender splits the loans into two. A second mortgage can go up as high as $450K.
That being said, I am not a mortgage lender, nor can I quote rates off the top of my head. But Steve can and he does it quite well. Got questions on mortgages? Call Steve, 847-963-1000.