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