It’s harder to get a mortgage loan these days. Lenders are more strict today than in the past. The pendulum has swung too far in the opposite direction. The market has over corrected itself.
Sound familiar? These are the mortgage-related headlines we’ve seen over the last couple of years. They suggest that the mortgage lending industry has gone from one extreme to the other – from overly lax to hypercritical.
David Stevens is the latest voice joining this chorus. Stevens, former FHA commissioner and current head of the Mortgage Bankers Association (MBA), says creditworthy borrowers are still being denied mortgage loans due to uncertainty within the lending industry.
“Some borrowers with good credit scores who are willing to make a 10% to 15% down payment still cannot obtain a loan,” Stevens wrote in a recent article for American Banker, a trade publication. “Because the rules governing lenders today are unclear … the risk of litigation, indemnification and repurchase has lenders running scared.”
What’s the cause of all this so-called uncertainty? As Stevens and others have suggested, it’s the result of new mortgage rules introduced by the federal government recently.
In January of this year, the Consumer Financial Protection Bureau, or CFPB, announced a series of rules that will affect the way mortgage loans are generated in the United States. Collectively, these rules are placed into one of two categories:
- The Ability-to-Repay (ATR) rule requires lenders to ensure that borrowers have the financial means available to repay their mortgage debts. By extension, this rule protects consumers from taking on mortgage loans that exceed their ability to repay, theoretically reducing the risk of foreclosure. It does this by requiring lenders to verify financial documents relating to income, employment and assets.
- The Qualified Mortgage (QM) rule goes even further, prohibiting a wide range of mortgage loan features and products deemed to be high risk. The goal of the QM standard is to create a “safer” mortgage product, and to make this mortgage product the standard within the lending industry.
Both rules are scheduled to take effect in January 2014. You can learn more about them by visiting QualifiedMortgage.org.
What Lenders Want from Borrowers
So, mortgage lenders are being more strict today. But what does that mean in terms of specific qualification criteria? Here’s what borrowers can expect when applying for a home loan in 2013.
1. Larger down payments. The days of no-money-down mortgage loans are over. Unless you use the VA or USDA home loan programs, you will have to put down at least 3.5% of the purchase price. That’s for an FHA loan. Conventional financing requires at least 5%, and sometimes 10% or more.
2. Higher credit scores. Bad credit or “subprime” mortgage loans have faded from use. Lenders today want to see good credit scores because they indicate a pattern of responsible borrowing. The minimum cutoff point varies from one lender to the next, but most are looking for scores of 600 or higher these days.
3. Less debt. Debt ratios have become one of the new deal-breakers in the mortgage loan industry. Lenders have long used these ratios to determine if a person is carrying too much debt. But they are more important now in the “new” lending environment. They’ve even been written into the Qualified Mortgage rule mentioned earlier.
Here again, the standards will vary from one lender to the next. Some lenders are limiting borrowers to a total or back-end debt-to-income ratio no higher than 45%. The government appears to be drawing a line at 43%.
4. More documents and explanations. To qualify for a mortgage in the current lending environment, borrowers must provide a veritable mountain of paperwork. This is necessary to meet lenders’ internal requirements, as well as those imposed by the federal government through the ATR and QM rules.
What’s the moral of this story? In a nutshell, borrowers shouldn’t make any assumptions when applying for a mortgage loan. As David Stevens pointed out, good credit and sizable down payments are no longer enough. Borrowers today have more reasons to keep their fingers crossed, during the application and underwriting process.