Even if you've bought a home before, wading back into the market in 2014 is bound to be a different enterprise from what homebuyers experienced before the recession. Recently implemented changes to mortgage guidelines in the U.S. mean that the qualifications and documentation required to secure homebuyers' loans are stricter and more comprehensive than in the past.
It's in every buyer's best interest to know the expectations that virtually every lender will now bring to the borrowing process. Let's look at the new mortgage landscape, outlining the key considerations and what you'll need to bring when approaching the lender's table.
The shortlist: Loan changes for homebuyers
In January, the Consumer Financial Protection Bureau's Qualified Mortgage guidelines went into effect, and so the circumstances surrounding loan qualifications have become more rigidly structured.
Generally speaking, the new guidelines are in place to help protect homebuyers from the kind of loans that contributed to the housing market's collapse circa 2007 and 2008. Along with that kind of protection, however, can come a narrowing of the passage between mortgage applications and a closed deal.
Major factors that come into play can be broken down as follows:
- Debt-to-income ratio: Adding together all the debt for which you make your monthly payments, the QM guidelines now specify that your debt-to-income ratio cannot exceed 43%. In other words, if you make $150,000 per year, you can't carry balances owed of more than $64,500. There can be some exceptions to the rule, especially for the self-employed, for whom lenders can sometimes consider other financial factors. Also, some loans, such as those issued along Veterans Affairs channels, can allow for a DTI ratio that is greater than 43%.
- Loan limits: The QM mandates that mortgages shall not be set for terms longer than 30 years. And the points and fees borrowers pay on their mortgages can no longer exceed 3%.
- Interest-only loans: One of the features that came with some pre-collapse loans -- risky ones, at that -- was an interest-only period, during which borrowers would make monthly payments that did not reduce the principal but only serviced accruing monthly additions. As of 2014, the CFPB rules do away with such options.
- Negative Amortization and Balloon Payments: Lenders can't issue a loan in which the principal increases month to month, and -- with limited exceptions for certain rural and "underserved" regions -- they aren't allowed to create a mortgage in which a large final payment is due at the end of the loan's term.
The QM guidelines aim to make it more certain that borrowers will be able to afford their loans and not find themselves upside-down, as many did during the now-receding crisis. In that sense, the new rules aren't simply a codification of things that banks did before -- as we saw, some did not enforce these kinds of stopgaps -- but rather true restrictions on how mortgages can be issued.
There are some gray areas, however, especially surrounding mortgages sold to Fannie Mae or Freddie Mac, as well as those insured by HUD, the VA, and similar agencies. The upshot: Pending possible future changes, these are considered to qualify under the QM guidelines even if their details (such as the DTI limit) do not entirely conform to those in the preceding list.
Documentation: What borrowers need in 2014
Under the 2014 QM guidelines, banks and lenders must now treat the documentation process more thoroughly. In other words, the era of low-doc and no-doc mortgages is over.
Lenders will seek details along eight main lines when it comes to loan applicants:
- Current or reasonably expected income/assets
- Current employment status
- Amount of the monthly payment on the loan in question
- Any monthly payments on simultaneous loans
- Monthly totals owed on other mortgage obligations
- Current debt of other kinds
- The borrower's DTI
- The borrower's credit history
With those parameters in mind, you'll want to bring at least the following to the table when seeking a mortgage in 2014:
- Forms that verify your employment
- Pay stubs
- Statements representing income from any assets
- Tax returns
- Bank statements
- Statements representing monthly bills to other loans and debts
- Any legal documents that outline alimony and/or child support agreements
- Copies of passports
Again, the changes represent a broadening of requirements that before were not typically applied to the kinds of loans that homes other than the most expensive required. It's a shift, and while the list might seem intuitive, given the new guidelines for documentation, loan experts still see applicants arrive without the necessary documents all too often since the January change.
"I routinely have to have conversations with customers who purchased pre-housing crisis who don't understand why they are now being asked to provide documents that they did not have to provide when they first purchased a home," says Hillary Legrain, a mortgage loan officer at First Savings Mortgage, in an email interview. "The days of not needing to provide much documentation to get a loan are over."
Catching up on the changes now can save you heartache later. And then, you can move forward knowing that rules are in place to proscribe the flawed products that led too many homeowners into hard-to-save situations throughout the middle of the last decade. You're in better hands, even if your mortgage process just got a bit more complex.
