On December 30, 2013, Redfin hosted a Google Hangout with mortgage expert John Wheaton to discuss how new lending regulations will impact homebuyers in 2014. If you missed the event, don’t fret! We’ve got all the key takeaways below.
Question: What are the biggest changes homebuyers should expect in 2014 when applying for a loan?
John Wheaton:
First, new rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act will require stricter lending standards for home loans. Starting in January, borrowers will need to provide more documentation when seeking a loan and the debt-to-income limit of the borrower will be set to 43 percent. As a result, some homebuyers will not qualify for a loan.
Second, the Federal Housing Administration (FHA) is reducing loan limits in 650 counties across the U.S. If you are planning on using a loan backed by the FHA, which allows borrowers to put down just 3.5 percent as a down payment, the maximum amount loan you can borrow may now be smaller.
Third, the government may be increasing fees for loans backed by Freddie Mac and Fannie Mae in 2014, which would increase the total mortgage rate you’ll have to pay. As of late December, however, this rate hike was put on hold while the incoming chief of the Federal Housing Finance Authority, Mel Watt, evaluates the policy.
Question: What borrowers will be impacted the most by these changes in lending regulations?
John Wheaton:
Many first-time homebuyers are likely to be impacted. These homebuyers do not have the kind of financial flexibility (cash, track record, credit scores, etc) that a move-up buyer does. Also, buyers with high debt levels, such as those with heavy student loan debt or car loans, may struggle to meet the new 43 percent debt-to-income limit. These homebuyers will be forced to seek out mortgage plans that are not underwritten by the government, and often require a much higher down payment.
Question: If buyers are unable to qualify for a conventional mortgage, what alternative financing options are available?
John Wheaton:
If a borrower does not qualify for a mortgage that is insured by the government (called a qualified mortgage), other options are available. Banks like Wells Fargo, Bank of America and Chase have all committed to providing non-qualified mortgage loans for these borrowers. However, these mortgages often carry a higher interest rate. Borrowers should expect to pay about a full percentage point more in interest on these loans.
Question: How will the new 2014 lending regulations impact home sellers?
John Wheaton:
For sellers, tightened loan standards raise the risk that a buyer’s bid will be rejected by their lending institution. Listing agents and sellers should be aware of this potential outcome and weigh the strengths and weaknesses of each financed offer they receive.
Sellers also need to prepare for stricter lending standards as they think about their next home. Once their home is listed for sale, the seller should immediately start the process of getting a fully underwritten loan approval. Sellers might expect that since they have purchased a home before, they will be eligible for a loan on another one. That may not be the case.
Question: What can homebuyers do to get the lowest mortgage rate?
John Wheaton:
While lending standards are tightening in 2014, the basics still apply. Rate and fee structures haven’t changed. You still need the “4-C’s” in order to get a good rate:
- Credit History (FICO scores)
- Capacity (Low debt-to-income ratios and sufficient income)
- Collateral (The home)
- Conditions (How you intend to use the property – owner occupied or rental)
Question: For homebuyers who want to purchase a home in the spring, how early should they start applying for home loans?
John Wheaton:
If you’re a buyer considering a purchase in April, the time to get your loan approval in hand is right now! I recommend that buyers secure a fully underwritten loan approval instead of just a pre-approval. The fully underwritten approval can help the boost the buyers’ competitiveness, particularly in multiple-offer scenarios. However, this process takes a bit more documentation, and around 10 days to complete compared to a pre-approval which sometimes is a half-hour process.
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