While many home hunters naturally focus on mortgage rates and how they will impact their purchase, changes to lending guidelines may also affect their borrowing costs and their ability to qualify for a home loan.
Some adjustments were made in response to events such as the economic crisis associated with the pandemic and the tragic collapse of a condominium building in Surfside, Florida. Others relate to increasing home loan balances, expanding the pool of vacation home buyers, and the goal of increasing home ownership for qualified buyers.
Here are the new rules you need to know before applying for a loan:
Condominium loan requirements
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 resource engagement manager for Inlanta. Mortgage in Pewaukee, Wis.
“Lenders are now required to perform additional due diligence when it comes to approving condominium units for conventional loans,” Gasparek said. “With a building collapse in Florida and major structural issues with multiple condos in the news recently, agencies want to make sure they are doing their part to help protect condo borrowers.”
Emerging questions condo associations must answer relate to the safety, soundness, structural integrity and livability of condos, said Terri Waring, executive chair and chief credit officer of Freedom Mortgage, headquartered in Boca Raton. , in Florida.
The focus is primarily on condos that were built 20 or more years ago and have deferred maintenance, building inspection results or jurisdictional results, and the financial impact of resolving these issues, Waring said.
“Buying older condo or co-op projects can be more difficult for buyers as lenders struggle to apply these new requirements to their review process,” Waring said. “Some condominium associations may refuse to answer new questions due to liability issues, which will make it difficult for lenders to approve the project.” In addition, Waring said, some lenders may not approve some co-ownership loans for fear of being forced to buy out Fannie Mae and Freddie Mac loans in the future.
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Condo loans already cost a little more than loans for other types of housing, and it’s possible that condo loans could become more expensive if lenders want to recoup the costs of additional documentation, Waring said.
High Balance Loans and Vacation Home Financing
As of April 1, mortgages for high balance loans and for second or vacation home loans will incur additional fees. A “high balance” loan, also known as a “super compliant” loan, is for an amount between the national base 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:
Upfront fees are likely to be included in the loan interest rate, although borrowers can pay points (one point equals 1% of the loan amount) to lower their rate if they prefer, a said Gasparek.
For high balance loans, borrowers will pay between 0.25% and 0.75% of the loan amount. For secondary home loans, borrowers will pay between 1.125% and 3.87% of the loan amount, said David Abelyan, founder and CEO of Cake Mortgage in Chatsworth, Calif.
Most lenders have already started incorporating these fees into their mortgage rate quotes, Gasparek said.
The updated fee structure is intended to increase the capital available to Fannie Mae and Freddie Mac and support their mission to help first-time buyers and low-to-moderate income households become homeowners.
“All capital and resources will be directed towards helping people refinance or buy their primary residence more economically and profitably,” Abelyan said.
Relaxed guidelines for self-employed borrowers
Earlier in the pandemic, Fannie Mae and Freddie Mac increased documentation requirements for self-employed borrowers to ensure they had a stable income and could afford to repay their mortgage. As of February 2, additional COVID-related documents were no longer required.
“They’ve removed the requirement for the current year’s cumulative income statement and three months of analyzing bank statements to ensure that gross deposits match the previous year’s earnings,” Sean Cahan said. , president of Cornerstone First. Mortgage in San Diego. “It’s great for the independent borrower.”
One or two years of tax returns can be used to show income for self-employed borrowers as long as they have filed their 2020 federal returns, Abelyan said.
New ways to assess creditworthiness
Starting last fall, Fannie Mae and Freddie Mac introduced new ways for loan seekers to have their rent payments reported on time as part of their credit review, including through bank statements.
“This could allow borrowers without a strong credit history to better qualify for a loan by evaluating 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 providing copies of pay stubs or other forms of credit verification. income. Borrowers can authorize verification of their income from direct deposits, employer data and tax return data. Automation should reduce errors, speed up loan application assessments and reduce costs.
Advice for home buyers
Homebuyers should be prepared for continued competition this spring and summer, Cahan said.
“Be sure to complete the loan application, send supporting documents and seek approval from a credit insurer,” Cahan said.
Lending guidelines and options change frequently, so Gasparek recommended borrowers choose a licensed mortgage advisor to help them find products or programs that suit their individual financial situation.
“Working with a trusted mortgage consultant ensures a homebuyer is aware of any new options in the market or any changes that may affect their ability to purchase a home,” Gasparek said.
Buyers who don’t have enough funds available to purchase a home can turn to alternative programs that help with down payment and closing funds, Waring said. They can also request gift funds from a family member to help offset the money needed to close the loan.
“As interest rates rise, discuss different mortgage options with your lender to get the lowest payment,” Waring said. “Once an offer to purchase has been accepted, discuss locking your rate as soon as possible with your lender due to market volatility.”
As home prices continue to rise and mortgage rates are also expected to rise, homebuyers should work closely with their real estate agent and lender to maximize their buying power and be prepared to act quickly when they find a home that suits them. .
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