Mortgage interest rates have been at or near historical lows for years now. Many people have taken advantage of this by purchasing a home, or refinancing their current mortgage. Those that have been contemplating one of these moves may find it a little more difficult to be approved for a mortgage in 2014 due to new mortgage rules going into effect on January 10th as part of the The Dodd-Frank Wall Street Reform and Consumer Protection Act. Here are three of the major changes you need to know before making an appointment with a mortgage agent.
1.) Debt To Income Ratio (DTI)
Under current regulations, borrowers must have a debt to income ratio of less than 45%. What that means is that the sum of all payments made towards debt each month (credit cards and any installment loan such as a mortgage or a car loan) can not exceed 45% of your monthly gross income. Additionally, banks can take into consideration extenuating circumstances such as large cash reserves, or debt that will be paid off in the short term to approve a mortgage for applicants who have DTIs greater than 45%.
Under the new rules, borrowers must have a DTI of less than 43%. Lenders also can no longer take into consideration other factors to approve applicants that have a higher DTI.
For a family that has a yearly income of $75,000 (or $6250 per month), under the old regulations, monthly payments towards debt would have to be less than $2812.50 per month. Under the new rules, those monthly payments would have to be less than $2687.50. That’s a decrease of $125 per month of that family’s income that could be used for debt payments.
2.) Limits on Fees
The new regulations limit fees charged by borrowers for originating the mortgage to 3%. While this may sound like a good thing for applicants, it may actually make it harder to get a mortgage approved. For smaller mortgages, this limit may cause banks to pass on loans that fail to generate sufficient funds for paying their staff and profit.
3.) Self Employment
Self employed people already find it more difficult to be approved for a mortgage as they are required to verify their income through tax returns and profit/loss statements instead of the traditional pay stubs and W2s. Self employed applicants will need to be able to prove they have sufficient cash flow, which may vary from month to month, to make a mortgage payment.
These changes are part of an ongoing reaction of the government to the mortgage crisis of the early 2000’s. While the changes are meant to ensure applicants are financially able to commit to a mortgage and prevent another mortgage crisis, they will make it more difficult for some applicants to be approved.
Are you planning on buying a house or refinancing your mortgage in 2014? Will these changes affect you?
Brought to you courtesy of Brock
We recently purchased our first *real* home after our first. We weren’t close enough on DTI for it to matter, but I know some people planning a similar move and it might affect them.
Not that these people don’t make enough to afford enough house, but they also have debt cash-flow obligations to meet.
Speaking of, I have to start paying off student loans in a few months… 🙂
Crazy to me how high (even at 43%) the DTI ratio is.
When we were buying our house, we were approved for a crazy unaffordable number. Our realtor kept trying to push us closer and closer to that DTI ratio. It was sad and crazy the corner we were being pushed into.
We still ended up around 30% DTI which I don’t like, but has been completely doable.
Thanks for the updates. Love to be forewarned of these changes even if they don’t effect me directly right now.
The Warrior
NetWorthWarrior.com
@Dan – I find the whole DTI thing interesting – 43% of monthly income going towards debt payments with an income of $500,000 a year is much different than 43% of a yearly income of $50,000. That being said….it still represents a significant amount of debt. Do student loans count towards DTI when applying for a mortgage?
@The Warrior – Mortgage agents love to push you to buy as much house as you can. It’s VERY important for each person/family to decide what DTI they are comfortable before getting to far in the process. Thanks for reading and commenting!!
When we were looking at buying our house, my fiance was self employed. It was so hard for us to be approved at first, so we held off from buying until he was no longer self employed. I guess it’s a good thing that they are tightening up the rules, though.
Luckily for us, I am only partially self-employed so I think it is a little easier on us. Tightening the rules is a good thing given what happened in the last decade, it’s really for the protection of all homeowners. Thanks for your comment, Daisy!