It is sometimes called the Qualified Mortgage (QM) Rule, other times it is called the Ability-to-Repay (ATR) Rule, either way there are new rules for mortgage pre-approvals as of January 10, 2014.
Getting pre-approved for a mortgage is an essential first step in the home buying process because real estate agents and the sellers the agents represent want proof of a buyers ability to secure a mortgage when an offer is accepted on their property. On the buyers side, buyers need to know what their buying power is and what their potential payments and costs will be. Everyone sees it as a good idea and a prudent first step in the journey to the largest single purchase most people will ever make.
This process began in the 1980’s when Mortgage Pre-Qualification was done by real estate agents. There were no credit checks and the interest rates were only used to figure monthly payments. Qualifying ratios were calculated only to determine buying power and give buyers a general idea of what they could afford.
In the 1990’s the mortgage industry emerged from the shadows and mortgage pre-qualification shifted from real estate agents to mortgage company representatives called Loan Officers. All of these mortgages were manually approved because automated underwriting and credit scores were not yet a part of the equation.
As we entered the new century the use of technology escalated and so did access to easy-to-get-financing. With an almost limitless variety of mortgage products, pre-approval became almost automatic because there was a mortgage product for virtually every borrower profile. Income verification was not necessarily required, marginal credit was OK and down payments were unnecessary because 100% financing was available in a variety of forms.
Then in 2008 Wall Street collapsed!!!
Have you heard of the Dodd-Frank Wall Street Reform and Consumer Protection Act? With the crash of Wall Street Congress enacted legislation to rein in the free credit practices of lending institutions. Part of Dodd-Frank created the Consumer Financial Protection Bureau (CFPB) who’s efforts are supposed “to make markets for consumer financial products and services work for Americans.”
Seeing the changes that were coming from this new government bureau, lending institutions began policing themselves and made radical changed to their lending practices. Instead of relying on pay stubs and W2’s, tax returns were added to the income verification mix. A paper trail was also required to determine the source of any funds that had been deposited into an asset account. Even though the money was right there in the account, if you could not document where it came from it was eliminated from consideration. Credit got extremely tight and mortgage lenders began using microscopes during the underwriting process.
The Mortgage Rules Were Rewritten
Beginning January 10, 2014 the Qualified Mortgage (QM) Rule went into effect. This new mortgage lending rule will impact residential mortgages on 1 to 4 family properties and will impact purchase money and refinance transactions. Because of these new rules lenders will be required to take more into consideration when making mortgage loans. The two most outstanding features of the rules are the Ability-to-Repay (ATR) and the Debt-to-Income Ratio (DTI).
To comply with the new rules and be able to sell mortgages on the secondary market to Fannie Mae and Freddie Mac, lenders will no longer be able to offer risky loans with features such as interest only, negative-amortization, loans longer than 30 years and they can not charge the borrower points and fees in excess of 3% of the mortgage amount.
Lenders will also be required to comply with the Ability-to-Repay Rule which sets the borrowers total monthly debt expense, including the proposed monthly mortgage payment, at less than 43% of income. Lenders must also “make a reasonable, good faith determination of a consumer’s ability to repay any consumer credit transaction secured by a dwelling.” To make this determination the lenders underwriter must consider:
- Current or reasonably expected income or assets;
- Current employment status;
- The monthly payment on the covered transaction;
- The monthly payment on any simultaneous loan;
- The monthly payment for mortgage related obligations;
- Current debt obligations, alimony, and child support;
- The monthly Debt-to-income ratio or residual income; and
- Credit History
The new rules were designed to ensure that borrowers get a mortgage that they can afford and to level the mortgage lending playing field. Under these new rules responsible lenders are not forced to compete with reckless lenders engaged in risky lending practices.
Modern Mortgage Pre-Approval
Even with the new rules in place a mortgage pre-approval is not scrutinized by a mortgage underwriter. According to Marcus McCue, Executive Vice President & Chief Business Development Officer for Guardian Mortgage:
It is not a final, binding loan agreement – that requires a broader underwriting and appraisal process. However, it does give home shoppers the best indication of the highest amount that they will be able to finance and any obstacles that need to be addressed before they are under contract to purchase a new home. Once cleared, the mortgage lender prepares a written document verifying the pre-approval, and the home shopper can present that document to their real estate agent to demonstrate their ability to finance the purchase. This document is often shared with the listing agent and seller to add strength and credibility to their purchase offer.
Before even looking at potential properties, the home buying process should start by visiting with a lender and initiating the Mortgage Pre-Approval process. If you do not have a lender that you are doing business we encourage you to contact one of the FireBoss Realty Preferred Lenders. Just click the Preferred Lenders link then click on on the lenders picture to be taken directly to their web site. Click the online application/prequalify button on their pages and provide them with the requested information. Please also let them know that you were referred by Scott & Amie Johnson with FireBoss Realty. We don’t get anything for referring you except awesome customer service. These lenders are PREFERRED for very good reasons. Specifically, they are all local, do their underwriting in-house and provide our clients with a single source of contact.
Once you have your financing lined up please visit www.NortheastDFWHomes.com, put in your search criteria and let’s go house shopping.
Unlike most of the well known property search sites on the internet (Trulia, Zillow, etc…), our Property Search web site is connected directly to the DFW Multiple Listing Service and has the accurate status of every home listed For Sale or Lease in the DFW Metroplex.
With your Mortgage Pre-Approval Letter in one hand and your list of potential Dream Homes in the other you are prepared to make a strong offer that will be taken seriously by the listing agent and the seller of YOUR NEW HOME!!!
FireBoss Realty would love to help you if you are looking for Homes for sale in Wylie, Homes for sale in Sachse, Homes for sale in Murphy, Homes for sale in Lucas, Homes for sale in Allen, Homes for sale in McKinney, Homes for sale in Plano or Homes for sale in Collin County.