Editor’s note: This is the first in a two-part series on current lending standards in the U.S. This story explains how the mortgage industry has changed in recent years, and how those changes affect individual borrowers. It also answers the burning question: How do I get a home loan in 2013? You can read part two here.
The mortgage lending industry has changed dramatically over the last decade, swinging from one end of the spectrum to the other.
During the housing boom, we saw a complete deterioration of lending standards in the U.S. Those were the days of easy credit when nearly anyone could get a home loan. Lenders used “exotic” mortgage products, such as stated-income loans and payment option ARMs, to qualify low-income and bad-credit borrowers.
But the housing crisis changed all of that. When the mortgage industry collapsed, lenders immediately tightened up on their qualification criteria. The government also stepped in, creating a set of new mortgage rules designed to limit those risky lending practices.
Getting a Home Loan in 2013
So here we are in 2013, and many consumers are utterly confused as to how to get a home loan. They know the mortgage industry has changed – they’re just not sure how it has changed, or what it means to the individual borrower.
What are lenders looking for these days? What kinds of hoops do borrowers have to jump through? In short, how do you get a home loan in the “new” mortgage market? Here’s what you need to know:
Fewer Loan Products Available
Earlier, I mentioned some of the high-risk mortgage products available during the housing boom. Let’s call a spade a spade here. Those products were designed to qualify unqualified borrowers. Most of them are now extinct. As a result, borrowers have fewer home loan products to choose from today. If nothing else, this should make your research easier.
As a borrower, your biggest choices are (A) fixed versus adjustable-rate mortgages, and (B) government-insured / FHA versus conventional home loans. Both of these choices have certain pros and cons associated with them. And speaking of the FHA…
FHA is Alive and Kicking (Sort of)
The Federal Housing Administration (FHA) loan program has skyrocketed in popularity since the housing market crashed. This program is particularly popular among first-time buyers, though it’s not limited to that group. If you’re wondering how to get a home loan in 2013, you should look into the FHA program. It offers several benefits over conventional financing.
These mortgages are insured by the federal government through the Department of Housing and Urban Development (HUD), which oversees the FHA program. These loans offer lower down payments when compared to conventional mortgages, and the qualification process is generally easier as well.
But the FHA has been through some hard times. They insured a lot of loans that went bad during the housing collapse, so they’ve suffered tremendous losses in capital reserves. As a result, the agency is now struggling to restore its capital reserves to the level required by Congress. One of the ways they’ve done this is by increasing mortgage insurance premiums for FHA loans.
HUD has also implemented some new rules for credit scores and debt ratios – rules that are meant to weed out certain high-risk borrowers (details).
If you want to get a home loan in 2013, you should at least consider the FHA program. Just know that it’s not a “slam dunk” anymore, as far as approvals go. It’s harder to get an FHA home loan today than in the past, a trend that applies to the mortgage industry in general.
It’s All About the Documents
This is a lesson on how to get a home loan in the new mortgage market. So we have to talk about documentation. During the housing boom, lenders didn’t require much in the way of documents. In fact, they frequently used “stated-income” and “low-documentation” home loans as a way to qualify borrowers with no supporting documents to speak of.
But those days are gone. Today, lenders want to see documents, documents, documents. As a borrower, you’ll need to provide a mountain of documentation to prove your income, assets, employment and debts.
Lenders are requiring more documents for two reasons. First, they are more risk-averse than in the past. We’ve seen the result of unrestrained risky lending practices. Mortgage lenders are also changing their ways to comply with new federal rules. These rules affect the way borrowers get home loans. They don’t take effect until 2014, but they’re already having an impact on the mortgage market. And that brings us to the next item.
New Mortgage Rules Coming in 2014
The Consumer Financial Protection Bureau (CFPB) recently announced new rules that will affect how you get a home loan. There are many components of the new rules, but they all fall into one of two categories – Qualified Mortgage (QM) and Ability-to-Repay (ATR). Another set of rules, the so-called Qualified Residential Mortgage (QRM), is still forthcoming.
The QM rule prohibits most of the high-risk, “exotic” mortgage features we discussed earlier. For instance, lenders cannot offer stated-income loans, negative-amortization loans, or payment option ARMs. At least, not if they want their mortgages to meet QM standards. And they do want their loans to meet those standards, because they are rewarded with legal protection from consumer lawsuits.
The Ability-to-Repay (ATR) rule will also affect how you get a mortgage loan. This rule requires lenders to verify and document the borrower’s ability to repay the mortgage debt. For the most part, lenders are already performing this kind of verification. The new rule just makes it official.
These rules take effect in January of 2014. But some lenders are already adjusting their procedures to comply with the new rules. Borrowers researching how to get a home loan should read up on these two rules. They will essentially set the bar for lending standards in the U.S.