How Will New Mortgage Regulations Affect You?

Starting in January of 2014, the mortgage market could be in for some major changes. In an effort to protect consumers, the Consumer Financial Protection Bureau (CFPB) has issued final rules for a “Qualified Mortgage” (QM), providing safe harbor for lenders who issue such mortgages. Mortgages that don’t qualify could expose lenders to lawsuits from borrowers. These changes may not please all borrowers.

Highlights:

• New mortgage rules are designed to ensure that borrowers can repay

• Jumbo loans will be harder to qualify for; interest-only & balloon loans no longer offered

• Homeowners will get renewed protections when they fall behind on payments

Features of the QM loan are:

1. No Excessive Upfront Points and Fees. QM places a limit on additional charges of 3% of the total amount borrowed.

2. No toxic loan features including: no interest only loans, no negative amortization loans, no terms beyond 30 years, no balloon loans.

3. Limits on Debt-to-Income Ratios. Debt-to-income ratios will be limited to 43% as compared to 45% currently allowed. A temporary exception will be granted for loans that are eligible to be sold or insured by Freddie Mac, Fannie Mae, FHA or VA. Consequently, the only loans subject to the 43% DTI limit would be jumbo loans (exceeding $417,000 loan amount). About 9% of jumbo loans issued in 2012 went to borrowers with DTI ratios higher than 43%, CoreLogic data show.

As reported by Bankrate.com, “The new mortgage rules won’t affect the majority of people seeking to buy a home or refinance their home loans because lenders have already tightened their lending standards since the financial crisis in 2008. But, analysts say that certain groups of borrowers will notice a difference. This is especially true for jumbo mortgage borrowers and self-employed borrowers who may need to jump through even more hoops to get a home loan.”

Attorney Robert Ledig reports, “It is possible that when the rule becomes effective in January 2014, lenders may be reluctant to make loans that do not qualify for the QM safe harbor. Non-QM loans will carry significantly higher litigation risks and may be more difficult to securitize. According to the bureau, non-QM loans would have amounted to about 22% of the market. Over time, it is possible that the new rule will result in a substantial reduction in the availability of mortgage credit.

Summary

The end result could be far fewer customized “portfolio loans.” Portfolio loans are those loans closed and serviced by commercial banks that are not sold in the secondary market. What does this mean for over 20% of current borrowers? You will need to work closely with your mortgage banker who will help find ways to fit unusual situations into the plain vanilla requirements imposed by the agencies. “We’ll just have to work even smarter and harder to get our borrowers the financing they need,” says Diane Pyshos, Senior Mortgage Consultant.

Photo Courtesy Of:  Haydn Blackey

Self Employed and Seeking a Mortgage? Don’t Despair!

A self-employed borrower is defined as someone who owns more than 25% of a business and/or who receives a 1099.  If the borrower falls into the “self-employed” category, don’t despair!  Diane Pyshos, Sr. Mortgage Consultant, A&N Mortgage Services, recommends contacting your mortgage professional to prequalify your income at least 6 to 12 months prior to your need for a mortgage. 

1.            How can you optimize self-employment income?   Your mortgage professional can perform three evaluations for you:  (a) calculate income needed to pre-approve your desired loan amount; and (2) evaluate your tax returns to determine your actual income, based on underwriting guidelines; and (3) report the net income shortfall to you and your accountant so that changes can be made to the next year’s tax return.  In many cases, small changes with expense deductions can make the difference between qualifying for the loan or not.  “The IRS will never mind reduced expense deductions resulting in a slightly higher income!” Diane says.

2.            What if net income looks really low?  “I know this is hard to believe, but underwriters actually “add” back certain expenses when calculating allowable income for underwriting purposes.  Expenses such as “business use of home” and “depreciation” can be added back to the adjusted gross income.  Your mortgage professional should be able to evaluate your tax returns before it is sent through a formal application process thereby notifying you if there is any income shortfall to meet your loan amount goals. 

3.            What documents are required? 

*             Two years personal tax returns with all schedules

*             A professionally prepared balance sheet and profit and loss statements for YTD income since your last tax return was filed

*             If the personal tax return includes other income on Schedule E,  two years corporate, SubS, Partnership, LLC, sole proprietorship, SubS and K-1’s will be required for any entity in which borrower owns 25% or more and K-1’s for any entity owned receiving K-1 income.

*             Internal Revenue Service Form 4506-T (which is usually prepared by your mortgage professional).  This allows lenders to request tax transcripts

4.            What if the tax return shows lower net income in the most recent tax return vs. the prior year?  The lender will use the lower income number.  If your recent tax return shows higher income than the previous tax return, the lender will calculate a two year income average.

5.            What if the down payment will be coming from the business bank account?  In order to use business funds for a down payment, the borrower must own at least 51 percent of the business and a CPA must state that taking money out will not negatively impact the business.  Plus, the property must be owned-occupied.  Business funds cannot be used to purchase rental properties. 

6.            Do lenders require self-employed borrowers to have a higher credit score than W-2 borrowers?  For conforming loans (=/<$417,000), there is no difference in credit score requirements for self-employed borrowers.  However, for jumbo loans (<$417,000), higher credit scores are required for self-employed borrowers.