What you need to know about mortgages
Posted by Franco Manueli
WHEN AILEEN JOURNEY and Shlomit Yosifon went to buy a house in Framingham in early December, they figured they’d be a shoo-in for a quick closing. Both have long work histories. Both make decent salaries. They have credit scores of 780 and 740, respectively, with car and student loan debt in the low five figures and nothing on credit cards. They easily made the 5 percent down payment required by the lender.
So why, despite being preapproved, did the couple’s mortgage take 35 days to close, more than a week longer than expected?
“I’m not sure if it’s incompetence or what the problem is,” Journey, a 47-year-old partner in and operations director of New England Behavioral Services, said a few days before the close. Every time her loan officer asked for another piece of documentation, Journey said, she promised it would be the last. And whenever Journey asked the loan officer for information, it would take her days to respond. “I always expect things to go wrong if they can, but I can’t understand why they aren’t telling us what’s going on. If they switched things and said, ‘You know, it’s going to be six weeks’ or whatever, I might not mind so much. I can’t figure out if there’s something fishy or if it’s just legitimately the way they do business.”
Journey isn’t the only one who’s confused. “There’s a lot of turmoil in the marketplace right now,” says Charles Ferraro, president of William Raveis Mortgage in Westford.
Three and a half years ago, with much input from now Senator Elizabeth Warren, an independent arm of the Federal Reserve called the Consumer Financial Protection Bureau was created as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Since then, the organization, which consolidates federal consumer financial protection authority previously handled by several agencies, has been creating new borrowing requirements in part to eliminate the shady mortgage practices that led to the financial meltdown. The rules — about 2,000 pages’ worth — went into effect on January 10 and will probably cause some uncertainty for the next few months. “The changes are extremely detailed,” says Ferraro. “There are a lot of ifs and buts and a lot of questions out there. Lenders will be double-dotting I’s and triple-crossing T’s and then double-checking everything again.”
New regulations always take time to sort out, he adds. “This is an automated business. Systems have to be changed, people have to be educated. Brokers, lenders, investors — all those parties have to come together and figure out how to do it.”
For some lenders, the new rules may not change the way they do business that much, because many have been more conservative anyway since the financial meltdown. But for others, says John Battaglia, president of Cambridge Mortgage Group of South Shore Bank in Hingham, there may be more fallout. “I hope in the long term it will help keep good lenders in play and keep out bad actors,” he says. “But any time you have such specific rules, it leaves out the judgment of the underwriter” — the person who decides whether and how much you can borrow and what the terms of the loan will be.
The big news is the codification of the ability-to-repay rule, which requires lenders to verify consumers’ financial information “to the nth degree,” according to Ferraro. If this rule is met — along with quite a few other requirements — the loan is considered a qualified mortgage, or QM, and the lender will have some protection from lawsuits by consumers claiming the loan terms are unfair or that they were sold a mortgage they didn’t understand and couldn’t afford. Lenders can make loans that are not qualified, but, Battaglia notes, “What [they’re] grappling with is what is the risk of doing a loan outside of QM?”
Qualified mortgages also require that a borrower’s monthly debt, including the loan, can no longer exceed 43 percent of his or her monthly pretax income. For the next seven years, government-backed conventional loans from Fannie Mae, Freddie Mac, the Federal Housing Administration, the Department of Veterans Affairs, and the Department of Agriculture’s Rural Development program — which together make up about 90 percent of the mortgage business in the country — don’t necessarily have to adhere to the 43 percent rule. But these loans are underwritten by your local mortgage lender and then often sold to Fannie and Freddie. And many lenders will choose to adhere to the 43 percent — or even stay below it — just to be sure that the government will take the mortgage.
“Yes, they can exceed 43 percent,” explains Ferraro, “but they don’t know how doing that will shake out till they position their underwriting. Some of the lenders say, ‘We’ll take the ratio cap down to 41 or 42 [percent] to make sure we don’t exceed it.’ Others are saying, ‘We used to be able to go up to 45; we’ll just hang there and see how the system responds.’ This is the problem with the regulations. They tossed a lot of stuff at the industry and just expect us to figure it out. They’re not offering a lot of clear guidance.”
Poor credit scores are also becoming a bigger hindrance for aspiring home buyers. A score of 620 used to be enough for a conventional mortgage, but that has changed in the past few years. (The average score nationally is 665, according to three national credit reporting agencies.) Today, Battaglia says, it’s “pretty doubtful” he could do a mortgage for someone with a score of less than 650. “With the loans we’re seeing through Fannie, Freddie, and the FHA’s automated underwriting system, it seems like ones with scores below 650 are not getting approved.” And loans to those with scores as high as 720 may cost more than they used to. “There are tiers,” says Battaglia. “If you had 20 percent down on a $500,000 house with a 680 credit score, you’d pay 4.875 percent interest with no points. At 700 it would be 4.625, and anything over 740 would be 4.5.” That’s more than a $32,000 difference over the life of the loan.
The moral of the story for consumers may be, if you don’t succeed with one lender, try again. But even when you find someone who will do your loan…
Continue reading by clicking on the link provided below:
By: Gehrman, Elizabeth. “What you need to know about mortgages.”
The Boston Globe. 02/02/2014. Web: What you need to know about mortgages – Magazine – The Boston Globe.
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Posted on February 12, 2014, in Mortgage Info and tagged Consumer Financial Protection Bureau, Credit Score, Department of Veterans Affairs, Dodd-Frank Wall Street Reform and Consumer Protection Act, Federal Reserve, homebuying, mortgage lenders, Mortgage Pre-Approval, Mortgage Ratios, Mortgage regulations, Mortgage Underwriting, QM, qualified mortgage. Bookmark the permalink. Comments Off.
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