The Truth About Lending
The Consumer Protection Financial Bureau introduced new regulations for mortgage lending in January 2014. This is the good news, and the bad news. First the bad news…it may be harder for you to find a mortgage. The good news is you will get a mortgage you can afford.
Why is that?
Lenders are now required to ensure you have the ability to repay your loan. No more risky loans like the ones that got the real estate market in such murky waters a few years ago. A safe option is to obtain one of the new Qualified Mortgages (QM) which have more stringent controls and requirements.
A QM cannot have an "interest only" period during which you do not pay down the principal. It cannot have a "negative amortization" with the loan principal increasing over time despite your payments. It cannot include a "balloon payment" which is a larger-than-normal payment at the end of the loan term in most cases. And it cannot have a term of longer than 30 years.
A QM also limits the percentage of your income you may direct toward a mortgage payment to 43 percent. Let's face it. We stand in that dream home and we swear we will be willing to forgo anything in able to live there. So what if we have to eat rice and beans for the next 20 years? We can skip the vacations…living here will be like a vacation every day! We promise we won't want any new clothes if we can just live here. Not true. In a few months, you won't feel that way. At the height of the mortgage madness, lenders were allowing 67 percent of your income to go to your mortgage. Whoa, doggies! Not a lot left over for the rest of life.
A QM also limits the amount of upfront fees and points a mortgage lender can charge you. (A point is a prepaid interest payment, and one point is one percent of the loan amount.)
But it is not just the consumer who benefits from a QM. These regulations protect the lender as well. If the loan meets the qualifications for a QM, the lender is automatically assumed to have ensured your ability to repay the loan.
So how to go about finding a mortgage? Talk to your Realtor. He or she should be able to refer you to lenders they have worked with on any number of transactions, proving the ability to get a loan funded. You should look to both the banks (who lend their own products) and mortgage brokers (who search through all the lenders to find the loan right for your situation).
Veterans, don't forget about your VA loan opportunity. That is a fabulous benefit. Make sure you take advantage of it.
You should get the mortgage approval process underway before you go looking at homes. How come? Well, you might think you can afford a certain purchase price, only to find out after you find your dream home the payments are out of your reach. Also, the inventory of houses is tight enough that there are likely to be multiple offers on a property. You will be in competition with other buyers who have done their homework. As a seller, the buyer with the loan closest to closing is the most attractive.
Before you talk to a lender, you will need to have information at your fingertips. This will include:
- Current assets and income, bank statements
- Employment status, pay stubs
- Credit history
- A list of your debts
- Monthly debt payments
If you had to short-sell a property (meaning the sales price was less than the mortgage on the property) you probably will need to wait two years before buying another property. However, there are lenders who can overlook that event.
Finding the right mortgage might take some time. Before you even begin, however, it is important to assess your financial picture, your goals and your priorities. Your Realtor can help you with this, though it is important to remember he or she is not a financial planner or accountant. But just because you CAN spend a certain amount on a mortgage doesn't mean it is a good plan for you and your loved ones. Make sure your mortgage fits in well with your plans for the future, which might include college for the kids or grandkids and, of course, retirement.
There are currently (as of noon on Nov.12) 131 properties available in San Benito County in all price ranges. Thinking about moving? Call your local Realtor.
This is a great time to put your home on the market. Think how great your home will show wearing its holiday best! Since interest rates are poised to rise, buyers who have been hesitating are starting to flock to the market.
It's a good life.
– Nants Foley, Broker Associate, Flora Real Estate Group, CalBRE 01222234, can be reached at [email protected] or 831-222-3596.