2 Reasons It Will Be Tougher to Get a Mortgage in 2014

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There's no doubt about it: This has been a banner year for the U.S. economy. Steady improvements have brought about the much-anticipated tapering of the Federal Reserve's quantitative easing program, and unemployment dipped to 7% in the fourth quarter.

Housing has improved, too. Sales prices are recovering, and the nation's markets are slowly normalizing. In September, the National Association of Home Builders noted that 291 of the 361 metro areas the group monitors are now considered "improving housing markets," the highest since the NAHB began tracking this metric two years ago.

If you are thinking that 2014 might be the year to jump back into the housing market, however, you may be disappointed. The brightening economy, along with some new mortgage rules that will debut on January 10, could combine to make financing a home measurably more difficult in the New Year. Here are the two biggest threats to those planning to obtain a mortgage in 2014.

A stronger economy will decrease mortgage affordability
This may sound contradictory, but the healing economy has produced two scenarios that will continue to constrain home buying: rising home prices, and the beginning of the end of the Fed's easy money program, known as QE3.

With the foreclosure crisis receding, home prices have begun to rise as reduced inventory pushes prices upward. Overall, this is a good thing -- except if you are applying for a mortgage, which may have now become too expensive to be affordable.

Likewise, long-term interest rates have risen approximately 1.25 percentage points over the past year, and promise to go even higher now that the Fed will be winding down the program that has been instrumental in keeping 30-year mortgage rates low.

Rising home prices and climbing interest rates are already having a deleterious effect on the housing market. According to the NAHB, 69.3% of homes sold in the second quarter of 2013 were considered affordable to buyers making the median income of $64,400, while only 64.5% of homes sold during the third quarter qualified as affordable.

Qualifying for a mortgage will be more difficult
New mortgage rules promulgated by the Consumer Financial Protection Bureau will go into effect next month and could send a chill through the mortgage-lending sector.

The rules seek to prevent another subprime meltdown and require lenders to document borrowers' ability to repay loans. They also ban certain types of loan products, such as no-documentation loans, negative amortization, balloon payments, as well as points and fees that constitute more than three percent of the value of the loan.

Loans that embrace these parameters will be categorized as "qualified mortgages," and lenders will be protected from liability if borrowers default.

While the added protections are good for both lenders and borrowers, some analysts see problems for those meeting the 43% or less debt ratio, as well as the self-employed and retired -- two groups of borrowers that may have issues with documentation of income. Others note that the added paperwork and expenseare the same no matter the size of the loan, which may result in fewer lenders offering smaller loans of $150,000 or less, which would directly impact the first-time homebuyer.

A change for the better? Time will tell
Some aspiring homeowners recently received one piece of good news, courtesy of incoming Federal Housing Finance Agency Director Mel Watts. Watts, who is set to be confirmed in January, has postponed fee increases by Fannie Mae and Freddie Mac on borrowers with less-than-stellar credit or those unable to put down a full 20% down payment. Those increases had been scheduled to go into effect in March.

While higher interest rates are certain to squelch home lending, not everyone thinks that the new CFPB rules will have the same effect. The agency's Director, Richard Cordray, has commented that most loans being made already comply with the new rules.

It seems likely that there will be some tightening of mortgage credit due to the new rules, however -- which, combined with higher interest rates and rising home prices, will make obtaining a mortgage much more challenging in the coming year.

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  • Report this Comment On December 28, 2013, at 6:17 PM, normgarry wrote:

    The mortgage market has been around 30% mortgage applications and 70% refinances. Many people are still underwater on their mortgages and can't simply move because they don't have enough cash.

    It's not going to get any better any time soon and having the government drop the DTI limit to 43% is like saying: "only rich people and people without any debt whatsoever need apply".

    The government has NO business in the mortgage business and they only make things worse.

  • Report this Comment On December 29, 2013, at 1:07 PM, Oliver10102 wrote:

    43% debt to income ratios have been done since I got my real estate license in 1988.

    In my 27 years as a realtor, I have never known anything else.

    The 42% is with the intended house payment, 28% without the payment. Although I have found that the 15% difference is not enough for the house payment, so they should be under the 28% to begin with.

    Whoever was doing them with a higher debt to income ratio.................. recipe for disaster as we have seen.

  • Report this Comment On December 29, 2013, at 9:15 PM, straydog11 wrote:

    43 48 50 % all a bunch of crap. If your monthly income is 6000 after taxes and after you pay your bills each month you have 2900 left to put in savings or take a little vacation or whatever? If you want to buy a little vacation cabin for say 35000 up in Gods country some where ,do the math. for 340 a month for X amount of years and bingo after taxes and Ins. You still have 2400 a month to spend on any thing you want. ops but your debt to income was over 50% so some Government agency or know it all banker or real estate genius says you have to much debt. That's a lot of Government and rich rules that neither our government or the rich live by. Oh all of this is with a 760 credit score and a 180000 of real estate free and clear. What a crock. And anyone that still thinks the housing crash was from the banks loaning money to people that couldn't pay are still misinformed or delusional. 20000000 people lost their jobs because of greed and bad government. Instead of giving the money to the people to pay their mortgages and keep their investments the government gave 750 billion to the banks and they took back the mortgages got richer a didn't pay back the tax payers. our government is in the toilet bad with the rich and special interest. God help the working brothers and sisters in this country...

  • Report this Comment On January 01, 2014, at 10:25 PM, Sabre171 wrote:

    I'm new to this forum. Articles like this drive me crazy because the author conveniently omits the fact that lower mortgage affordability, stricter underwriting guidelines, fewer mortgage products and rising rates all put downward pressure on home prices.

    Prices may be rising, but they'd surely rise faster if any of the aforementioned circumstances were different (assuming no new inputs to make home buying more difficult) Fewer people able to buy homes for whatever reason reduces demand or perhaps in this case lessens it at the very least.

    My point is that the author doesn't address that these new hindrances to getting a mortgage will have some impact on the amount of buyers chasing the same house ( which is what is needed to drive up prices).

    Economics don't occur in a vacuum.

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