New QM Mortgage Guidelines

I’ve traded a few emails with friendly mortgage agents this week, and I’m discovering that their business is not as strong as the drive-by media would have you think. That’s because the number of homes purchased with a mortgage loan has been dropping steadily since last May. Instead, cash is king for many reasons. Investors generally have cash, and as mortgage rates began creeping up late last year, even average homebuyers started opting to purchase with all cash. That trend may continue as new loan requirements become stricter.

For buyers who need a mortgage, there are a few new guidelines to contend with under the Consumer 

Financial Protection Bureau's Qualified Mortgage (QM). QM is designed to help avoid the borrowing catastrophes that probably caused the housing crisis. These new guidelines are the rules lenders use to prove borrowers' have the ability to repay a loan.

My mortgage originator friend wrote to me saying,”I've begun to set my sights more toward 

commercial loans. My personal minimum commercial loan is a million, which is kind of the threshold for local banks, I think it will be a nice change from the regulatory frustration (of home loans). I can solicit nationwide (don't have to be licensed in each state) and the best thing, regulation is a minimum.”

You can see her concern, especially as the new guidelines state that borrowers may not exceed a debt-to-income ratio of 43 percent. Debt-to-income ratios have already been in place but the new rules don't allow for any mitigating circumstances. That means that not even a significant down payment or large cash reserves will be allowed to offset a higher debt ratio. And remember here, debt from all sources, including auto loans, credit cards, unpaid hospital bills and student loans (and loans that have been long forgotten, which seem to have a way of reappearing when you least expect them).

The incentive to follow these guidelines is huge for the lender. If the mortgages don't meet the QM guidelines, the lender will be required to hold the loan as opposed to selling it to Fannie Mae and Freddie Mac. And lenders generally DO NOT want to hold loans.

The QM requirements also have lower loan limits now than before for conventional conforming loans. The Federal Housing Finance Agency will announce its adjustment of loan limits later this year, because the agency is trying to see what kind of impact the new QM guidelines will have on the housing industry. For most housing markets, the current limits are $417,000 and up to $625,000 in high-cost areas. How these figures will change will be revealed later in 2014.

Origination fees will be limited under the QM requirements, which could make getting a smaller loan more difficult. Origination loan fees will be limited to no more than 3 percent of the loan amount. This could make mortgage lenders less likely to offer smaller loan amounts because they may not always be able to recoup their costs and make a profit.

Self-employed borrowers—like Realtors--already face tough standards when they need a loan, and these standards will be even more strict later in 2014. In the new QM guidelines, all borrowers must prove there is sufficient cash flow to make payments on their loan but self-employed borrowers' incomes typically fluctuate. These borrowers may have cash reserves that they rely on to pay bills when their income is off in a particular month, but even if there is a large amount of money in reserve, it may still be difficult for the self-employed borrower to get a loan approved due to this new "ability-to-repay" QM guideline.

Dane Hahn is a real estate professional affiliated with Sarasota Realty Associates in Venice. You can reach him at dane.hahn@gmail.com or by phone at 941-681-0312. Read his old and new columns at http://reedge.blogspot.com/. See him on the net at www.danesellsflorida.com.