The verdict was nearly unanimous at a recent hearing on Capitol Hill: The new federal “ability to repay” and “qualified mortgage” regulations that took effect Jan. 10 will make obtaining credit tougher, not easier, this year, and potentially force large numbers of credit-worthy homebuyers to defer or cancel their plans.
What nobody addressed at the hearing, though, was the elephant in the room: what, if anything, can buyers do if they find it difficult to meet the new standards ?
The testimony came from mortgage, banking and credit union leaders — even the head of a nonprofit Habitat for Humanity chapter. Though they didn’t dispute the good intentions of Congress or federal regulators in adopting the sweeping changes — banning or severely restricting most of the worst practices and loan features that facilitated the mortgage debacle of the last decade — they said the new rules amount to overkill.
By forcing creditors to offer mortgages within a tightly confined box of complex underwriting requirements and imposing crushing financial penalties for infractions, the new regulations are making lenders hyper-cautious about approving anybody, especially applicants who appear marginal or don’t quite fit the standard profile.
Bill Emerson, CEO of Quicken Loans, one of the country’s highest-volume lenders, said the new rules could “impair credit access for many of the very consumers they are designed to protect.”
Those hit by the tougher standards are legion — young first-time buyers with student debts, middle-income minority buyers, self-employed individuals and those whose incomes are not received at regular intervals, plus just about anybody with household debt that exceeds 43 percent of income.
But are there ways for such consumers to up their odds of getting a mortgage this year, rather than waiting the 12 to 24 months it may take for regulators to assess the impact of their rules and loosen up? Yes. Here are a few practical strategies.
– Debt ratios. Though the baseline standard for a new qualified mortgage is that a borrower’s total debt-to-income ratio should not be greater than 43 percent, lenders say there is wiggle room if you search for it. For example, conventional loans being sold to giant investors Fannie Mae and Freddie Mac may exceed 43 percent by a little, provided the overall application makes it through the companies’ electronic underwriting systems, which take multiple factors into consideration beyond household debt burdens.
Dennis C. Smith, co-owner of Stratis Financial in Huntington Beach, Calif., says “we’ve had some people with 44 percent to 45 percent” debt ratios get through the hoops. Smith uses another technique where appropriate: Getting a qualified co-borrower, typically a close relative, to join with the buyer and sending the application to Freddie Mac, which he says has a more generous rule on non-occupant co-borrowers than Fannie. According to Smith, this allows a sharing or “blending” of household finances and can produce a lower overall debt-to-income ratio if the non-occupant co-borrower has a strong financial profile.
Another option: The Federal Housing Administration (FHA) offers additional flexibility on debt-to-income ratios in its version of a qualified mortgage. Though FHA has raised its insurance premiums recently, it is still an important potential resource if your debt levels are high and you have only modest down-payment cash. FHA’s minimum down is still just 3.5 percent; Freddie and Fannie require at least 5 percent.
John Councilman, president of AMC Mortgage Corp. in Fort Myers, Fla., says that FHA’s current maximum acceptable debt-to-income ratio through its underwriting system appears to be around 50 percent. Applicants who are veterans should check out VA loans for similar flexibility, and buyers in rural areas should look to the Department of Agriculture’s loan program.
– Down-payment assistance. Toughened federal rules are shedding new light on some alternatives that get relatively little public attention: hundreds of bond-funded, low-cost mortgage assistance programs run by state and local housing finance agencies. According to an online service that tracks them and helps connect buyers with houses and funding, www.downpaymentresource.com, there are nearly 1,600 such programs across the country. The site estimates that 70 percent of for-sale listings in any given market are eligible for at least one of these programs.
Bottom line: borrowers may have options. Potential borrowers should check them out with the help of an experienced loan officer who works with a variety of funding sources — ask about that up front.