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More changes to Mortgages this month

On January 10th, new regulations went into effect for residential mortgages.

The “Qualified Mortgage” rule and the “Ability to Repay” rules are now part of the process when obtaining a mortgage.

At first glance, these appear to be major changes to how mortgages are approved but upon further review, it looks like most mortgages already comply with the new rules.  We examined our business the last few years and we estimate that 97% of our loans made would be Qualified Mortgages.  The ones that weren’t were probably commercial or hard money loans from a time when we could broker those types of loans.   As a residential mortgage banker-since August of 2011, we don’t offer commercial or hard money loans.

The Qualified Mortgage rule defines a type of mortgage that can be sold on the secondary market-Fannie Mae and other agencies. This Qualified Mortgage is one where the fees, terms, and features are defined so that in theory, agencies don’t run a high risk when they buy the loans from banks. One of the features is a lender needs to consider the borrowers ability to repay the loan.  This falls into the “DUH, we already do that” category.

Once again, it appears that much to do was made over nothing.  Life in the mortgage business goes on.


Big changes to mortgages next year!

The Qualified Mortgage Rule is taking effect on January 1st of 2014.  what does this mean for the prospective borrower?

It could be a lot.  First we must explain what is defined as a Qualified Mortgage.

A Qualified Mortgage is a mortgage that is assumed to be non risky and that the lender has done adequate qualifying to ensure the borrower can repay the loan.  the consumer Finance Protection Bureau released this definition earlier in the year.  To see the exact definition, here’s a link:


Lenders who do not make Qualified Mortgages will have to retain 5% of the loan on their books as a hedge against the risk of default.  this is not an ideal situation for lenders, as they want to sell the loan to an agency like Fannie Mae and simply service the loan.  Fannie Mae and Freddie Mac are probably not going to buy a non qualified mortgage as of this time, so essentially all conforming loans will have to be Qualified Mortgages.

What are the features of a Qualified Mortgage?

     No Excessive Upfront Points  and Fees-Points and fees cannot exceed 3% of the amount borrowed

No Toxic Loan  features Interest only, negative amortization, balloon payments and terms over 30 yrs. are prohibited.

Limits on Debt-to-Income  Ratios-The new standard will be 43% of total debts to pre-tax income.


Who is likely to be affected by the new Qualified Mortgage rules?

Jumbo loans for those seeking to borrow more than $417,000 in most areas

Borrowers with high debt to income levels.  right now, it is possible to get up to 50% debt to income level approvals if the borrower is strong in other regards, but that will go away with the new rules.  Most of the time, this comes up when a borrower is buying g a new home but hasn’t sold their old home and is trying to qualify with both house payments for the short-term.

Borrowers seeking to buy down the rate.  Paying discount points to get a lower rate will probably not be an option once the Qualified Mortgage rules go into effect.  the 3% cap would not allow for that.

Borrowers buying less expensive homes.  If there is that 3% cap on fees and the borrower is paying $475 for an appraisal, $600 in title fees, and say $1000 in other fees, that would mean any loan under $69167 would be a high cost loan according to the Qualified Mortgage rule.  Here in our market, Boise Idaho, there are some homes that fall under that price.

Mortgage Brokers typically have to charge a 1% fee on top of the other fees and that can put them over the 3% cap.  I expect to see the rate on brokered loans to increase to cover this fee.  Many Mortgage Brokers are changing to Mortgage Banker if they can as they do not have that extra fee, typically.

The next few months will see many changes to the market.  It will be important to keep a local lender who stays up to date with those changes.




















Can I get a “gift” from my parents for a down payment?

Yes, you can! This is the classic case where the parents help out the kids buy their first home. It is allowed under Fannie Mae, Freddie Mac, and FHA mortgage guidelines.

The rules vary by program, but generally, the rules are it has to be a true gift and no expectation of repayment. It can’t be a loan to be paid back.
There will be a letter stating that it is a gift from the parents (or any other family member) to the borrowers and it is signed by all parties.

There is also a set of documentation that needs to accompany the gift to prove that it was the parents to give, it was deposited into the borrower’s account, and what the balance is after the gift was deposited. FHA also requires that the parents show what account it came from.

There is also a provision in the FHA mortgage guidelines that allow a family member’s “gift of equity” to purchase a home that the parents own but want to sell to the kids.

For Fannie Mae and Freddie Mac, the rules are slightly different. You can get a gift for part of the down payment but you would need a minimum of 5% of your own funds into the deal. Here is how this could work. You have 5% saved for a down payment and want to go with a conventional loan. You can get a gift for 15% from a family member and that would give you a total down payment of 20%. Having 20% down allows you to get a conventional loan without having to purchase private mortgage insurance. This is the exact deal that my wife and I got when we purchased our first home. Thanks Mom and Dad!

Anyway, if you think you will need a gift for a down payment, its best to come see your local mortgage professional ahead of time. There is a little extra work and time required to put this together. You also want to make sure your family members are aware and able to do the gift when you need it.

If you need further assistance with a gift for down payment, contact me at 208-955-1234 ext. 30.

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