Home loans are harder to get than they've been in years. Stricter new rules starting next year could add to the stress. Mortgage rates are rising, and while there have been some signs of a lending pickup in the strengthening housing market, banks are still making one-third as many loans as they did before the housing crash.
So how do you get a mortgage to buy or refinance your home? And should you rush to get a loan approved now before it gets harder?
Depending on your circumstances, you might want to get that home deal done before the rules take effect in January 2014. There will be a new limit on how much you can borrow, and you will need to document things more thoroughly - no more "no doc" loans or "teaser" adjustable rates to help you qualify.
But rather than rush a big decision you will have to live with for years, it's probably a good idea to take time to understand how to be a responsible borrower and work within the new guidelines.
Here are things you can do now to prepare for the changes ahead:
1. Don't change jobs if you can avoid it. Try not to go job-hunting and mortgage-shopping at the same time, mortgage specialists say. Job stability is one of the cornerstones of the new "Ability to Pay" mortgage rules, which are part of the "Qualified Mortgage" guidelines mandated by the Dodd-Frank banking reforms. The rules require borrowers to show clearly that they can cover mortgage payments based on existing incomes in order for theirs to be considered a "qualified mortgage" that conforms to federal standards. Lenders that follow the rules will be protected from consumer lawsuits. A stable job history is critical under the rules, so if you're changing to a better job, you might have to wait a while to make a home purchase.
You will need pay stubs and tax forms for your mortgage application. It might also help your chances of getting a loan approval to bring job evaluations, bonus or sales-incentive records, or letters that show you are a valued employee. But don't cook things up. Make sure your documentation can be verified.
"Sometimes lenders will want to see a letter from a [certified public accountant] to explain income records that are not clear," says Jordan Roth, senior branch manager of GFI Mortgage Bankers, a New York-area housing lending firm.
Exactly what you need to document about your job is not spelled out. The Consumer Financial Protection Bureau rules say lenders should "examine a consumer's past and current employment" and take into account "any information the employer offers on continued employment." The lenders "will be playing it very safe and looking closely at income," says Charles Dawson, a housing finance policy specialist for the National Association of Realtors. "It will take them time to get comfortable with the new rules and see how they should be applied."
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One thing is clearer. Your mortgage cannot be considered a Qualified Mortgage if it lifts your overall household debt to more than 43 percent of your income. This rule, mandated by the Dodd-Frank financial reforms, is slated to take effect Jan. 10, 2014. It means that with a monthly household income of $10,000, your overall debt limit is $4,300 a month, with the new mortgage included.
Also, adjustable rates will no longer help you qualify for bigger loans. Under the "Ability to Pay" rule, the loan payment is calculated using the highest possible rate charged over the life of the loan. A fixed-rate payment will usually be much lower than that maximum adjustable loan payment.
2. Try smaller, community lenders. The new rules exempt community banks and smaller institutions from some requirements, giving them more latitude to approve loans. If you feel you can handle a larger debt amount than the 43 percent cap allows, these lenders might offer an alternative. Some lenders will be more willing than others to consider more than just income caps, such as local real estate conditions or local lending standards. The QM loan rules have enough flexibility that some banks will, during a seven-year transition period, be able to offer lending alternatives based on existing loan practices similar to those used by Fannie Mae and Freddie Mac loan programs.
So it might require you to shop around. National Association of Realtors blogger Broderick Perkins writes on Realtor.com that even now, ahead of the new rules, it's normal to talk to a dozen lenders. "The mortgage hunt today is like finding your way through a maze," Perkins writes.
3. Before you go mortgage shopping, cut your debt. Maybe this should be Rule No. 1, given the toxic impact of too much debt in the post-crash era. Still, access to credit is a big, necessary component of the U.S. economic system. It just needs to be managed and considered in your overall financial plan.
"Everyone who wants to qualify for a mortgage should watch their debt," says Sam Khater, senior economist at housing data provider CoreLogic. "This is the time to get it down if it's out of line."
A few common debt-related reminders might help. You should know that any credit card application will show up almost immediately on your credit report, even if you plan to cancel the card quickly. Resist the big discount that friendly salespeople offer if you sign up for a store credit card. The same goes for that incredibly low monthly car lease. It will be treated as debt and can have a big credit impact, depending on the car's total value. Student loans also count toward the debt cap.
Home refinancings will be harder for many homeowners who lost equity in the housing crash. This usually means they'll borrow more for a second mortgage, and it will sometimes put them over the 43 percent lending cap.
Easy re-fi cash is hard to resist. Yes, you can lower your monthly payments when rates go down, but second mortgages do not always make sense. They extend the life of your home loan and can sharply reduce the amount of equity you pay off each month.
The new rules all underline the Consumer Financial Protection Bureau's mantra that people should not be set up to fail by going too deeply into debt. It's mostly common sense. Stretching your budget to get into a dream house can be a nightmare. Try to consider it as part of a total financial plan that makes sense, advisors say. And if the mortgage doesn't fit it, you shouldn't get it.
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