Mortgage Loans: Five Changes You Should Know About
January 29, 2010
The American economy is still recovering from the mortgage crisis, and with the economic recovery and employment numbers still on shaky ground, investors in the mortgage marketplace today are still extremely cautious. Why does this matter to borrowers? Investor apprehension ultimately translates into a continual tightening of lending guidelines. However, it is not all doom and gloom. Home loans are still being made, and there are still very successful mortgage and real estate professionals who are adapting to the constant stream of changes to get deals done.
The following five recent changes are important to every prospective home buyer or homeowner looking for a purchase or refinance mortgage loan.
1. Tightened credit score requirements
Even if you have 20% ready to plunk down for a new home, that may not be enough to qualify for a conventional loan. Beginning in December 2009, Fannie began rejecting applicants with a 20% down payment if their credit scores were below 620.
2. Lower debt-to-income ratios
Mortgage lenders will now want to see a lower maximum debt-to-income (DTI) ratio--defined as your monthly debt payments, which includes your monthly mortgage payment, divided by your monthly gross income. This change was also driven by Fannie Mae, whose automated underwriting system now caps an applicant's debt-to-income ratio at 45% for a refinance or purchase. With "compensating factors," the actual tolerance from Fannie is more like 50%. But this is still a significant change in the marketplace. In the past, mortgage loans were approved with monthly debt obligations well above 55% and sometimes 60% of a borrower's gross income.
3. Continued record-low mortgage rates
If you are looking for a purchase home loan or a refinance, record low interest rates are a bright spot that will make your monthly payment lower. These low interest rates won't last forever, though--the Fed is set to unwind its support of the secondary mortgage market in 2010, which should result in higher mortgage rates.
4. New disclosure requirements that may delay closing
Recent regulatory changes increased lender disclosure requirements, and waiting periods can mean a 30-day close is cutting it close. The challenge to the mortgage lender is to make sure the mortgage loan is preapproved properly at the beginning of the process, any challenges are discussed upfront, and the client doesn't change his or her loan program or terms. Working with the best mortgage lenders and maintaining an open line of communication is one way to ensure that these new rules work for you, not against you.
5. Fewer opportunities for low down payment financing
The Federal Housing Administration (FHA), which has offered home loans for as little as 3.5% down, recently announced that borrowers with FICO scores under 580 will soon be required to put 10% down for an FHA loan.
However, those who are looking for more financing can still turn to the USDA's Rural Development Agency, which is still offering 100% financing with no mortgage insurance. It sounds too good to be true, but it's a real option for borrowers who fit certain income and geographic criteria. Keep in mind that "rural" often includes areas that are in fact suburban, so don't discount this program without looking asking your mortgage lender.
While mortgage rates are still at all-time lows and home prices are still depressed, tighter lending guidelines--and constantly shifting regulations--make the home loan process that much more difficult. A seasoned mortgage professional will be able to guide you through the myriad changes that are reshaping the mortgage industry.
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