In early 2014, a series of new rules issued by the Consumer Financial Protection Bureau (CFPB) will be implemented which will make getting a home loan more difficult. If you plan to buy a new home, and you are self-employed, you might want to get started on the process now so you can close on your purchase before changes take effect.
In the past, banks and mortgage lenders with long-term relationships with their well-healed clients, could be somewhat lenient when it came to getting copies of tax returns, documenting assets in retirement plans and other accounts and getting proof of earnings when completing a mortgage application.
As reported in this article in the September 27 Wall Street Journal, starting on January 10, 2014 borrowers will have to provide lenders with more documentation than ever to qualify for a mortgage. More tax returns, more statements and more pay stubs.
And, lenders will require borrowers to have a debt-to-income ratio below 43% to qualify for a loan.
It is anticipated that these changes will hurt two groups – self-employed people who have a harder time documenting consistent earnings and jumbo mortgage borrowers who will need higher levels of debt coverage to qualify for a loan.
Before the credit crisis of 2008, most jumbo mortgage loans were securitized, packaged and sold off to other organizations. Loan underwriting standards became lax and the credit quality of these loans was often actually lower than the credit rating of the securitized investment. Many loans defaulted and much of the mortgage industry melted down.
Since the credit crisis things have changed. According to the WSJ article it is estimated that just 7% of the jumbo mortgages that are created in 2013 will be securitized. That means that the companies (primarily banks) that originate the loan will most likely hold the loan. The goal of tightening these loan underwriting standards is to improve the overall quality of the loans in each lender’s portfolio and to help continue to steady the mortgage system so that the secondary loan market can continue to stabilize.
The new rules will also contain new fraud provisions that will apply to borrowers. If a borrower misstates income levels or the condition of the home that they are buying they can be charged with mortgage fraud.
Even with the recent increase in home prices, home affordability levels are very high, interest rates are low and housing supplies are low. If it makes sense, now might be a good time to find the house (and the mortgage) of your dreams.
~ Allyn Hughes, CFP®, ChFC®, CLU®, CAP® — Brooks, Hughes & Jones – Partners in Wealth Management – Tacoma, WA