Lending changes to come

December 13, 2013

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As part of the Dodd-Frank Act, new mortgage changes will take effect next month, prompting many to question how they will impact the housing market. After a solid year of price appreciation and steady home sales, the new set of rules should be understood by all borrowers hoping to get a low cost mortgage in 2014.

Qualified mortgage
U.S. Department of Housing and Urban Development recently changed what it defines as a qualified mortgage - or a mortgage that can be backed by the department. The new definition and standard will begin to take effect Jan. 10 next year. Many borrowers are wondering how the change will affect mortgages in 2014.

The new standard will not allow mortgage terms to exceed 30 years and will, for the most part, eliminate risky factors associated with borrowing. Fees and upfront payments may also not exceed 3 percent, though certain loan types may be exempt from this limit. Lenders will also need to be stricter when approving mortgage applications by conducting an analysis of financial information and records.

The goal of the changes is to set the standard higher for what types of mortgages lenders should be giving to Americans and to move away from short-term, high interest loans. The housing market collapsed in 2008 in part because of many subprime mortgages, so higher standards could greatly improve the overall health of the economy and prevent another financial disaster.

The Wall Street Journal reported that about half of all mortgages that defaulted during the recession could have been prevented by the new regulations that will soon come to pass. Additionally, 25 percent of loans made during that time would not be approved next year.

Ability to repay
In an effort to help borrowers avoid defaulting on their loans and maintain the health of the mortgage market, the new regulations also include a stipulation that debt payments cannot exceed 43 percent of household income. However, loans by Fannie Mae and Freddie Mac can have larger debt-to-income ratios.

"This sets the bar higher for consumers and changes the game in terms of how people lend and how they qualify that consumer," Cameron Findlay, chief economist at California-based Discover Home Loans, told U.S. News.

Contact the Federal Savings Bank, a veteran owned bank, to explore low cost mortgage options.