Former Federal Reserve Chairman Ben S. Bernanke said the mortgage market is so tight that even he is having a hard time refinancing his own home loan.
If Bernanke can’t refinance and President Barack Obama may not qualify for a mortgage ... where does that put you?
On Jan. 10, the Consumer Financial Protection Bureau’s Ability-to-Repay Rule went into effect. The agency issued about 800 pages of new rules defining who should be considered a “qualified” borrower.
Under the new Ability-to-Repay Rule, mortgage lenders must look at customers’ income, assets, savings and debt, and weigh those against the monthly payments over the long term. This is the guideline that Bernanke and Obama may not meet: future earnings.
The new rule lays out basic guidelines that lenders must follow. Loans within these guidelines are called “qualified mortgages,” and they give lenders greater certainty that they are meeting the Ability-to-Repay requirement.
The reason the mortgage approval process is now so rigorous is simple. Avoiding defaults and loan buybacks has become the primary goal of mortgage lenders. It doesn’t take many bad loan buybacks to close the doors on many small mortgage operations.
The major lending houses (Bank of America, Chase, Citi, Wells Fargo) suffered billions of dollars of losses repurchasing loans from Fannie Mae and Freddie Mac. Higher standards are reducing loan defaults, which should mean fewer foreclosures in the future. Government data show that less than 2 percent of loans originated in 2009 that were resold to Freddie Mac and Fannie Mae went into default after 18 months, down from more than 22 percent default rates for 2007 loans.
Professionals with established careers whose earnings fluctuate may no longer be considered good credit risks and are having trouble getting conventional financing.
This includes self-employed professionals, retired borrowers and borrowers who cannot show two years with an employer because they’ve shifted jobs multiple times. You must show “stable monthly income” to support the new mortgage debt based on the Ability-to-Repay rules effective in January.
Back to common sense lending guidelines. Home loans are widely available to anyone with reasonably good credit, reasonably decent rainy day savings, adequate home equity or down payment and proof of consistent income that is at least twice your housing expense and other monthly debt payments.
Be prepared to provide W-2s for the last two years, recent pay stubs and bank statements for all financial accounts.
Mike and Judy Malone are vice presidents and loan officers (NMLS 449954/449953) at Heartland Mortgage in Durango. They can be reached at jmalone@heartland-bank.com or 375-2265.
