While many house hunters naturally focus on mortgage rates and how they will impact their purchase, changes to loan guidelines can also affect their borrowing costs and their ability to qualify for a home loan.
Some adjustments have been made in response to such events as the pandemic-associated economic crisis and the tragic collapse of a condo building in Surfside, Fla. Others are related to rising home loan balances, the expanded pool of vacation home buyers and the goal of increasing access to homeownership for qualified buyers.
Here are the new rules that you should know about before applying for a loan:
Fannie Mae and Freddie Mac already require most condo projects to go through a detailed review process that includes a questionnaire provided by the condo association, said Melissa Gasparek, production resources engagement manager for Inlanta Mortgage in Pewaukee, Wis.
“Lenders are now required to perform some additional due diligence when it comes to approving condominium units for conventional loans,” Gasparek said. “With the building collapse in Florida and major structural issues with several condominiums in the news recently, the agencies want to ensure they are doing their part to help protect condo borrowers.”
New questions condo associations must answer address safety, soundness, structural integrity and the habitability of condos, said Terri Waring, senior executive president and chief credit officer for Freedom Mortgage, which is headquartered in Boca Raton, Fla.
The primary focus is on condos that were built 20 or more years ago that have deferred maintenance, building inspection findings, or jurisdictional findings and the financial impact of addressing those issues, Waring said.
“The purchase of older condo or co-op projects may be more challenging for buyers as lenders struggle to apply these new requirements to their review process,” Waring said. “Some condo associations may refuse to answer the new questions due to liability concerns, which will make it difficult for lenders to approve the project.” In addition, Waring said, some lenders may not approve some condo loans because of the fear that they could be forced to buy back the loans from Fannie Mae and Freddie Mac in the future.
Condo loans already cost a little more than loans for other types of housing and it’s possible condo loans will become more expensive if lenders want to recoup the costs of additional documentation, said Waring.
Beginning April 1, mortgages for high-balance loans and for second home or vacation home loans will require an additional fee. A “high-balance” loan, also known as a “super-conforming” loan, is for an amount between the national baseline loan limit and the maximum loan amount in high-cost housing markets. For example, the conforming loan limit in 2022 is $647,200 in most of the country. Here are the limits in Massachusetts:
The upfront fee is likely to be wrapped into the interest rate on the loan, although borrowers can pay points (a point is equal to 1 percent of the loan amount) to reduce their rate if they prefer, Gasparek said.
For high-balance loans, borrowers will pay between 0.25 percent and 0.75 percent of the loan amount. For second home loans, borrowers will pay 1.125 percent to 3.87 percent of the loan amount, said David Abelyan, founder and CEO of Cake Mortgage in Chatsworth, Calif.
Most lenders have already begun to incorporate those fees into their mortgage rate quotes, Gasparek said.
Updating the fee structure is meant to increase the capital available to Fannie Mae and Freddie Mac and to support their mission of helping first-time buyers and low-to-moderate income households become homeowners.
“All capital and resources will be geared toward helping people refinance or purchase their primary residence in a more economical and cost-effective way, said Abelyan.
Earlier in the pandemic Fannie Mae and Freddie Mac increased documentation requirements for self-employed borrowers to make sure they had stable income and could afford to repay their mortgage. As of Feb. 2, the COVID-related additional paperwork was no longer required.
“They removed the requirement of the current year-to-date profit and loss statement and for three months of bank statements to be analyzed to make sure the gross deposits match the income of the previous year,” said Sean Cahan,president of Cornerstone First Mortgage in San Diego. “This is great for the self-employed borrower.”
One or two years of tax returns can be used to show income for self-employed borrowers as long as they filed their 2020 federal returns, Abelyan said.
Beginning last fall, Fannie Mae and Freddie Mac introduced new ways for loan applicants to have their on-time rent payments reported as part of their credit review, including through bank statements.
“This could enable borrowers without a robust credit history to better qualify for a loan by evaluating the rent payment history as part of the credit profile through their automated underwriting engine,” Waring said.
Freddie Mac recently announced a new automated income assessment tool for mortgage lenders that allows them to use direct deposit information from bank accounts rather than provide copies of pay stubs or other forms of income verification. Borrowers can provide permission to have their income verified from direct deposits, employer data and tax return data. Automation is anticipated to reduce errors, speed up loan application evaluations and lower costs.
Home buyers need to be prepared for continued competition this spring and summer, Cahan said.
“Make sure to complete the loan application, send in supporting documents, and ask for a credit package underwriter approval,” Cahan said.
Loan guidelines and options change frequently, so Gasparek recommended that borrowers choose a licensed mortgage consultant to help find products or programs suited to their individual financial situation.
“Working with a trusted mortgage consultant ensures a home buyer is aware of any new options coming to the market or of any changes that could affect their ability to purchase a home,” Gasparek said.
Buyers without enough available funds to purchase a home can look into alternative programs that assist with down payment and closing cost funds, Waring said. They can also ask for gift funds from a family member to help offset the money needed for closing the loan.
“With interest rates rising, discuss various mortgage options with your lender to obtain the lowest payment,” Waring said. “Once a purchase offer has been accepted, discuss locking in your rate as soon as possible with your lender due to the market volatility.”
With home prices continuing to rise and mortgage rates anticipated to rise, too, home buyers should work with closely with their real estate agent and their lender to maximize their buying power and to be ready to move quickly when they find a house that works for them.
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