Despite mortgage rates remaining relatively stable and at their lowest in years, many buyers are still finding that qualifying for a mortgage is more difficult than previously. Average down payment requirements are higher, second mortgages or Home Equity Lines of Credit are few and far-between if they are available at all, and the added expense of Private Mortgage Insurance is required for anything less than a 20 percent investment on your part.
However, in this world of shrinking credit and stringent requirements, a breath of fresh air might be on the horizon for creditworthy borrowers who are struggling to save the required down payments.
The Dodd-Frank law, along with Congress and a group of federal regulatory agencies such as the Federal Reserve, the Federal Deposit Insurance Commission, the Department of Housing and Urban Development, and the Federal Housing Finance Agency, have outlined requirements for a “qualified mortgage”, setting criteria for what would constitute a reasonably safe, basic mortgage that both loan originators and consumers could have faith in.
The qualified residential mortgage would allow lenders issuing them to sell them to investors with confidence, and therefore avoid the full risk associated with the possibility of default on the loan. A qualified residential mortgage borrower would meet pre-determined criteria including down payment stipulations and third-party income verification. The law is aimed at prompting banks to take ownership of the loan and ensure the borrower has the best possible chance of paying it back. If a mortgage cannot be considered qualified, the bank would need to retain 5 percent ownership in the loan and set aside extra capital to cover it in case of default.
With regards to the down payment portion, banks, real estate agents, and consumer housing advocates are developing arguments against the typical 10 or 20 percent down payment option, as many potential creditworthy homeowners would be priced out of the market, even though they are low-risk borrowers.
Instead, proponents of smaller down payments believe the market should set the down payment costs based on risk-assessment or underwriting. Underwriting involves looking at the borrower’s credit history, and income and debt levels, much as responsible lenders currently do today.
In the meantime, borrowers with lower down payments or credit scores, can still access good term mortgages with lower interest rates through FHA. In fact, even though the fees can be off-putting, buyers can qualify for a 3.5 percent down payment at a 4.25 percent interest rate! Also, some lenders are already underwriting a 5 percent down, 4.7 percent interest rate mortgage to people with great credit, avoiding the need to apply for an FHA loan. The hope is that the Dodd-Frank Law will make this type of program more prevalent, and have it extend into the larger, direct lenders as well.
One thing is for sure, the days of easy credit are over, but these kinds of innovative programs may help both lenders and borrowers obtain mortgages that will help them live the American Dream without breaking the bank account.
For more information about mortgages, visit our website at www.heartrealtors.com and give one of our preferred lenders a call. Or feel free to contact me directly by voice or text at 310-259-7419. You can also email me at email [email protected].
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