With the New Year upon us, we all take time to reflect on the previous year and look forward at things to come…
In 2013, we saw mortgage interest rates start to rise by about 1% from Spring through Fall as overall economic conditions improved and the U.S. stock market posted its highest percentage gain since 1997. That being said, mortgage interest rates continued to be at historic lows which allowed many home buyers to enter the market for the first time. Low interest rates also allowed many current homeowners to “move up” to new homes, selling their previous home to first time buyers entering the market.
Home values in the United States continued to stabilize and many areas saw a rise in home prices in 2013. Dane County exemplifies this trend as seen in the chart below:
|# of New Listings||9517||8776||8641|
|# of Sales||6957||5565||4362|
|Avg. Sale Price||$241,611||$230,957||$240,990|
|Median Sale Price||$212,400||$203,000||$207,500|
|Total # of Active Residential Listings at End of Period||2642||3195||3921|
As we look forward into 2014, the focus in the mortgage world will turn to increased Federal regulations. On 1/10/14, the Consumer Financial Protection Bureau (CFPB) instituted the “Qualified Mortgages” (QM) rules. Along with the new QM rules, lenders must also make a “reasonable and good faith determination based upon verified and documented information that, at the time the loan is consummated, the consumer has a reasonable ability to pay their loan, according to its terms”. This is known as “Ability to Repay” (ATR).
What makes a loan “QM”? There are 8 basic requirements:
1) Maximum 30 yr loan term
2) Must have substantially equal monthly payments
3) No negative amortization
4) No interest only payments
5) Generally no balloon payment (exception to small creditors)
6) 3rd party documentation of everything (income, assets, employment, credit, etc.)
7) Total points and fees cannot exceed 3% of total loan amount (Different for loan amounts <$100,000)
What are the general things that lenders must look at to determine “ATR”? There are 8 basic pieces:
1) Income or assets
2) Employment status
3) Expected monthly payment on a new loan
4) Monthly payment on any simultaneous loan
5) Monthly payment of mortgage related expenses (Taxes and Insurance)
6) Current debt obligations, alimony, child support
7) Monthly debt-to-income (DTI) ratio or residual income (generally DTI not to exceed 43%)
8) Borrower’s credit history
Why are QM and ATR important to borrowers?
The new rules are designed to protect consumers from abusive practices that took place prior to the financial crisis. If lenders do not follow these rules, they open themselves up to the possibility of lawsuits and severe monetary penalties. These possible severe penalties mean that lenders will not want to deviate from these rules. Lenders can offer “Non-QM” loans, however, they must be able to demonstrate that the borrower has the ability to repay (ATR) the loan.
Borrowers may therefore be required to provide more documentation than before and lenders will be doing more verification of employment, income, and assets than ever before. Borrowers should make sure to provide exactly what a lender asks for and not try to anticipate what they “think” the lender can use. This makes it more important than ever for a borrower to work with a lender that understands these new rules and can help guide the borrower through the process.
Even with the rise in interest rates and changing regulatory environment, potential home buyers should not be afraid. The reality is that most lenders have been documenting loans using “QM” and “ATR” rules for the past several years even before the new rules were introduced. Interest rates continue to be at historic lows, still making homes more affordable than ever. As long as home buyers go into the market with the proper expectations and work with an experienced lender to assist them, the goal of home ownership is still within reach.