New Loan Regulations for 2014
There has been a lot of buzz around the new loan regulations that are rolling out for the New Year and this article will simply outline the big changes. These changes are set to roll out on January 10th, 2014.
All of these changes are in response to the mortgage crisis that we have seen since 2007. It is meant to help ensure that borrowers are borrowing money that they can repay and that loans are given to those who are good candidates. “Qualified Mortgages” are what the CFPB- Consumer Financial Protection Bureau- has been calling these new standards for 2014. These qualified mortgages offer lenders protection from lawsuits and will become industry standard.
A Qualified Mortgage will not allow any risky loan features. Negative amortization, Interest only loans and Balloon loans will be eliminated. Loans will not be for more than a 30 year term. Some banks use these features to help borrowers qualify for more money. In the past they have been able to skew the numbers in a way to make purchasers qualify by stretching the term past 30 years or doing an interest only loan. The goal is for most of these risky features to be phased out of the market and create more solid loans for borrowers and banks alike. Some of the above mentioned loans will still be available with small banks in 2014.
One of the changes in lending is that the fees charged will be limited to 3% of the loan. This 3% will include the fees associated with the loan and the mortgage lenders fee as well. The forecast on this rule is that loans up to $160,000 will be less desirable for lenders as they will not have the ability to make much money on them. In fact, some lenders will not make any money on loans under $160,000 as the fees associated with the loan are the same as on higher loans thus making these less desirable for banks to work on. This could limit the number of banks willing to do loans in this price range and in turn make purchasing a home under $160,000 more difficult. Potentially this could affect the first time buyer market for 2014.
Another change is the debt to income ratio will be set at no more than 43%. Lenders use debt to income ratios to qualify homeowners for their loan by adding up the new mortgage amount and other monthly debts and dividing that by their monthly income to come up with the debt to income ratio. This new rule will bump potential homeowners out of the market if they are currently on the high end of the debt to income ratio or force them to look for less expensive properties. This could potentially be another hit to first time buyers and other buyer on the cusp of the new 43%.
Overall these changes are a good thing for the market in the long run. It will help ensure that the recent mortgage crisis will not happen again in the near future and that borrowers are not biting off more than they can chew with loans. In the short term these changes could affect the market and keep home prices from rising in 2014.
Written by Amanda Folkestad and Brian Porter