You may have heard that new mortgage rules have made it more difficult for consumers to qualify for home loans. That’s true for certain borrowers — but not all.
The Consumer Financial Protection Bureau implemented the controversial “qualified mortgage” rule this year, and lenders say the impact on consumers hasn’t been as severe as feared.
Lenders must show that borrowers can repay
A qualified mortgage, also known as a QM loan, requires the lender to verify a borrower’s ability to repay. Sometimes it’s called the ability-to-repay rule. A QM loan is presumed to have less likelihood of going into default, and for that reason, the lender gets legal protections.
Sky didn’t fall; people are getting loans
As the rule was about to be implemented, many in the lending industry said the QM rule would prevent many eligible borrowers from getting mortgages.
“But it’s not nearly as bad as some people thought,” says Pete Grabel, mortgage loan originator at Luxury Mortgage Corp. in Stamford, Connecticut. “We do thousands of loans and I would say in the last six months we’ve had only a handful that was impacted.”
You may qualify with high debt-to-income ratio
When lenders determine ability to repay, they consider the borrower’s debt-to-income ratio. There has been confusion over whether a loan can be a qualified mortgage if the borrower has debt to income over 43 percent.
Debt to income, or DTI, is the share of monthly income that is spent on debt payments, including mortgages, student loans, auto loans, minimum credit card payments and child support.
Formula: Debt payments / income
Example: Jessie and Pat earn $10,000 a month. Monthly debt payments are $3,800. Their DTI is 38 percent ($3,800 divided by $10,000).
Example: Micah earns $3,000 a month. Total monthly debt payments are $1,320. Micah’s DTI is 44 percent ($1,320 divided by $3,000).
In fact, it is possible to get a qualified mortgage with a DTI over 43 percent. That’s because loans approved by the automated systems of Fannie Mae, Freddie Mac and the Federal Housing Administration are exempt from the 43 percent DTI limit.
Most won’t have trouble getting loans
For many borrowers, loan availability hasn’t changed much, says Cyndee Kendall, sales manager for the Northern California region for Bank of the West. The borrowers who are least affected are those who:
- Have stable jobs with W-2s.
- Collect regular pay stubs.
- Need loans for amounts within the conforming loan limit.
Mortgages above the conforming limit are called jumbo loans. The conforming limit is $417,000 in most places but can go as high as $625,500 in high-cost areas such as San Francisco. Here’s what you should know about jumbo loans.
“It’s not the disaster that everybody said it was going to be,” says John Walsh, president of Total Mortgage Services in Milford, Connecticut. “But is it preventing some people from getting loans? Yes.'”
Some borrowers will have difficulty
Certain types of borrowers — including self-employed, commissioned employees and those looking for jumbo loans — may have to jump through more hoops or look harder for loans since QM was implemented, Kendall says.
“There have been some people who would have possibly been approved (for a mortgage) last year who would not be approved today,” she says.
Here’s who is most affected by the QM rule
The impact of the QM rule falls mostly on borrowers in the following groups:
Affected by the QM rule
- Jumbo borrowers with high debt-to-income ratios.
- Recently divorced parents.
- Self-employed people and business owners.
- Salespeople on commission and people emerging from unemployment.
1. Jumbo borrowers with high debt-to-income ratios.
If you seek a mortgage over the conforming limit and your DTI is higher than 43 percent, you might have to look harder for a lender. You won’t be able to get a loan from a jumbo lender that will lend only within the QM criteria.
2. Recently divorced parents.
If you rely on alimony or child support income to qualify for a mortgage, you have to show that you have received this income for at least a year. If you have received it for less than a year, the income cannot be considered.
3. Self-employed people and business owners.
Lenders are required to dig deeper when looking at the incomes of self-employed borrowers, including a closer look at the company’s liabilities, capital losses, credit card debt and the balance sheet.
If the paperwork shows that your self-employment income has declined over time, you may have trouble getting approved for a mortgage, Kendall says. “If their income is trending lower, it would be an issue that could prevent approval, even if the income is sufficient,” she explains. “Before, you could look at it and assess the situation more subjectively. Now we have to calculate income exactly how the regulation says.”
4. Salespeople on commission and people emerging from unemployment.
Borrowers who rely on commissions to qualify for loans must be able to document their commissions for at least a year and ideally for two years. Those who recently returned to the workforce after being unemployed for a period also may struggle to get a loan in the first six months of employment.
Some lenders offer non-QM loans
If you don’t qualify for a QM loan, you still might be able to get a mortgage. “It just means a consumer will have to spend more time shopping for an institution,” Kendall says.
Before the rule was implemented, many lenders said they wouldn’t lend outside the QM box. Now that the rule has been implemented, a growing number of lenders offer non-QM loans.
Bank of the West, for example, offers jumbo loans that allow borrowers to have DTIs as high as 50 percent. It also offers interest-only loans, which fall outside the QM guidelines.
Grabel, of Luxury Mortgage, says his company offers a number of programs for non-QM loans. “Now that banks know what they can expect, I think we will be seeing many more non-QM loans,” he adds.
Non-QM loans have strict standards
The non-QM loans may have stricter requirements in areas besides debt to income. They may require high credit scores or limit loan-to-value ratios.
The loan-to-value ratio, also called LTV, is the share of a home’s value that is covered by mortgage debt. Expressed as a percentage.
Formula: Mortgage amount / Home’s market value
Example: Pat buys a $100,000 house and gets an $80,000 mortgage. The loan to value is 80 percent. ($80,000 divided by $100,000)
“Interest-only loans are available, but at reduced loan-to-value,” Grabel says.
Allen Beydoun, senior vice president for United Wholesale Mortgage, says his company recently started offering non-QM loans.
“The loans are designed for those clients looking for jumbo loans, clients who are self-employed and have higher DTIs,” he says. “But we are talking about clients with strong reserves, a FICO score of 740 plus and loan-to-value of 75 percent.”
Savings for a rainy day. Lenders typically require borrowers to have at least two months’ worth of house payments set aside as reserves.