Getting a California Home Loan In 2014 Will Be Tougher

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Getting a California home loan in 2014 will be tougher. January of 2014 will present another set of lending guidelines designed to keep lenders in line and make better California home loans.  An unintended consequence will be that 1 in 4 or 5 borrowers will not be able to get a FNMA type loan.

The new rule, aka QM, stands for quality mortgage.  The definitive rules have yet to be laid out by the CFPB due to the November elections.  Isn’t it amusing how the government ties mortgage lending rules to elections?  Hmmmmm.  The CFPB is basically the mortgage cops.  It is a new agency created to hold lenders and people who originate loans to a standard of excellence.  Loan brokers are who they police, but they don’t police the big banks, ie..BofA, Chase, Wells Fargo, and Citi and their loan originators.  They still let them run amok. Why? I don’t know.  Loan brokers and big banks should be held to the same standards, after all we all offer the same loans and in 2013 alone, several of the big banks were fined millions of dollars for subpar lending practices (they also pay millions of dollars toward political campaigns!.)

The new rules will not only affect a California home loan borrower, it’s a nationwide rule.  What is changing?   No more interest only loans, a cap on lender and loan originator fees per loan, no more 40 year loan terms, larger down payments will be needed  and one of the most difficult hurdles for the consumer is the maximum of 43% debt to income ratio.

The 43% debt to income ratio limit will mean many homebuyers will not be able to afford a California home loan.  43% of your gross income is the maximum amount that can go out towards mortgage, auto, credit card and other credit related expenses on a monthly basis.

So what happens if you’re above that?  Than the loan will not be able to a FNMA, or Freddie Mac loan. Why is this important?  These are the most common loans out there right now, and they are bought and sold on the open market in bundles as investments.  A borrower that doesn’t meet the QM guidelines can not be included in those bundles.  Lenders need the availability to sell your loan on the open market so that they can get their money back, and lend it out again, collect their fees, and than lend that same money to other homebuyers, it’s about liquidity.  So each loan must be able to be bought and sold on the open market and each loan must meet certain guidelines to be included in these investment pools.  FHA loans are not affected by these new rules but word is out it also is working on similar guidelines to roll out mid to late 2014.

There will be other options out there for buyers who don’t meet these new rules, but you can bet it will come at a steep cost in the form of higher rates and costs.  Many California first time homebuyers hover at the 45-50% debt to income ratio since they are just starting out with their careers, so this new rule will hit them particularly hard.

Getting a California home loan in 2014 will be tougher. We can’t afford to see another calamity like we did from the 2007 bubble bursting, we are still to this day feeling affects from it, but our real estate economy is slowly recovering.  These new rules will put a damper on the California first time homebuyer but I do remember the days when it took a minimum of 20% for a down payment to buy a home, it hasn’t got quite back to those days but January 2014 in some ways will mirror lending from the 1970’s.  Hopefully unintended consequences don’t scare off borrowers trying to get a California home loan to the point where they feel renting is a more affordable option.  Having something you can call your own along with the tax breaks that come with it, when possible, still to me outweigh renting property.

Best,

Kevin Walton

 

 

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