Most realtors and lenders associated with the residential real estate business are fully aware that Consumer Financial Protection Bureau (CFPB) regulatory guidelines have now taken effect. But, few seem to understand what that means as related to the way mortgage loans will be underwritten. In my opinion, the "Ability to Repay" rule will/already has become the primary driver of underwriting/lending trends this year.
The Ability-to-Repay rule has produced a new consumer defense to a foreclosure. This regulation places an additional burden on lenders to determine not only if the borrower can repay the loan now; but, if a borrower can make a claim in future years that the loan could not be repaid. This has already altered the way in which lenders manage their risk and underwriting policies.
Conclusion: The bad news for borrowers is this trend will continue, making the acquisition of a new more difficult. The good news is most underwriting standards have already been stiffened during the past year in anticipation of the pending changes. So loans submitted to underwriters today will likely not be treated much differently than those received during the past several months.
Many seniors have found their post-retirement monthly incomes aren’t sufficient to qualify for a mortgage under today’s tough underwriting standards: Thanks to a recent rule change, you may be able to use imputed income from your 401(k), IRA and other retirement assets to qualify for the loan you want without actually tapping those balances or drawing down cash.
Many have seen their monthly incomes — heavily dependent on Social Security and limited pension plan payouts — plummet after retirement. Yet on paper they look relatively comfortable financially. They’ve got growing IRA and 401(k) retirement account balances.. They often have solid equity in their homes, good credit scores and at least modest savings.
But if these same people apply for a refinancing or a new mortgage to buy a home, suddenly they’re told they don’t look so great. They often can’t qualify under the debt-to-income standards required for today’s post-recession underwriting.
However, a recent change in underwriting requirements offers seniors a little extra boost on qualifying income if their financial assets permit.
Take this hypothetical example provided by Freddie Mac (Fannie Mae has adopted similar changes) credit officials: Say you’d like a new, low-interest-rate mortgage but your debt-to-income ratio is too high to qualify. However, you have $800,000 sitting in a retirement account that you haven’t touched yet and that you could access with no IRS penalty. Here comes the good part: Under the federal mortgage investors’ policy change on qualifying income standards, your monthly income could be higher for underwriting purposes than it appears at first glance.
The loan officer could use your $800,000 in untapped retirement assets as follows: First the lender essentially discounts the $800,000 to take into account possible market swings that could reduce what you have available. Freddie Mac requires loan officers to multiply your retirement fund assets by 70% to arrive at a conservative number. This brings your retirement funds — for underwriting purposes, of course — down to $560,000 ($800,000 times 70%).
Next, the underwriter divides the discounted fund balance by 360 to arrive at what is in effect 30 years’ worth of monthly draw-downs from the fund — in this case, $1,556 ($560,000 divided by 360 equals $1555.56). The lender then can add the $1,556 to your current Social Security, pension and other verified qualifying income for the purpose of computing your debt ratio. You may never have to draw down a dollar from your retirement funds to pay the mortgage, but the fact that you have easily accessible financial assets available to do so changes the underwriting equation.
The computations can get a little complex, and there are some technical rules and definitions that lenders are required to follow. But the bottom line is this: If a debt-ratio problem is preventing you from getting a new mortgage, and you’ve got substantial untapped retirement funds that might help qualify you on income, don’t settle for a rejection. You may have more income — at least for underwriting purposes — than you thought.
Most all of us are aware there have been many changes within the housing market recently. I wanted to cover some of these changes from a lender perspective in order to assist both buyers and realtors in getting through the process of obtaining financing on that next residential property.
1. Lenders and brokers are now subject to more regulation. There have been multiple reforms/regulation changes. As with most regulation the intent is good. However, the end result of these changes is more documentation requirements from the borrower and disclosure to the borrower has become even more confusing for them.
The regulation with the most impact in a purchase transaction is the pending Qualifying Mortgage Rule which officially takes effect in 2014 (though most of the ideology is already being practiced). Within this rule there will be much greater scrutiny of both credit and income documentation. Also, stated income loans and interest only loans will officially be banned as FNMA eligible loans.
2. High loan to value (little or no down payment) loans are still available. However, it will cost more than in the past. PMI companies have re-adjusted their premiums and all government guarantee entities have increased their premiums. As you might guess, there have been massive losses within the business over last few years and reserves are now being replenished. (I recently discussed with most of you that FHA loans will require MIP payments for life-of-loan being June 1st of this year).
3. Lender paranoia is still in full swing. It used to be that typically the only time FHA would refuse a loan or require a lender to repurchase a loan would be in the case of misrepresentation or fraud. Now, FHA may very well refuse to guarantee a loan if they feel the lender did not strictly follow the guidelines.
Also, restrictions on eligible income have been tightened. For example, income from a second job will not likely be allowed unless it is documented W-2 income from the same source for at least 12 months or within the same field for at least 24 months with no more than a 30-day interruption.
It is also worth noting that within the midst of this paranoia there has been a vast turnover of lender underwriters. Many were let go due to lack of volume during the housing downturn or just became tired of the business and moved on. Now that volume has increased somewhat many underwriters have hired on with new companies and are learning new investor overlays or are just simply inexperienced and not efficient.
Three Reasons Your Clients Should Consider Buying Now
We all realize it has been a buyer’s market for some time. Residential property inventories have remained high and interest rates have remained low. Thus, potential buyers have not had much motivation to act now! For those of you with clients counting on an FHA loan in order to make their home purchase, the time to purchase that home may in fact be now.
There have been some recent changes that will adversely affect your clients wanting to utilize FHA financing for a home purchase if they do not act soon:
1. Monthly Mortgage Insurance Payments (MIP) is increasing .10 basis points beginning April 1st. Thus, for a $200k mortgage, your client will be charged an additional $20.00 a month. The increased MIP charge will be $40.00 per month on a $400k mortgage, etc.
2. FHA borrowers with a down payment of less than 10% will pay MIP for “life” beginning June 3rd. For those financing 90% LTV or less, MIP will be paid for 11 years, up from 5 years previously.
3. Mortgage rates may be increasing. 30-year mortgage rates have increased .14 basis points over the past three months (source: mortgage-x.com). This increase has been slight and may not continue. However, it has been a steady trend of upward movement to be considered.
If you have clients that are on the fence on whether or not to buy, please share this information with them. Because, waiting will cost them!
Please feel free to contact my office with any questions you may have or to provide additional assistance to you and/or your clients.
Coleman Mortgage Company
5935 Old Bullard Road
Tyler, TX 75703
1-866-772-3437 toll free 1-800-680-3153 fax