Relocation comes with a lengthy to-do list and its own lingo. Last month, two new words were added to the language of relocation – qualified mortgages – the new rules that now govern who gets approved for a loan and who doesn’t.
So what’s a qualified mortgage, commonly called QM in the world of relocation, banks and real estate?
The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act created the Consumer Financial Protection Bureau, which wrote the newly enacted rules on how mortgages are approved. All lenders must now assess income, assets, credit history, other debt obligations and employment status. If lenders do not follow through on these evaluations, borrowers who cannot make their mortgage payments can contest foreclosures on the grounds that the lenders did not properly judge their financial standings and risk.
Enter QMs, which offer lenders additional protection against litigation. In a QM mortgage, borrowers cannot spend more than 43 percent of their monthly pre-tax income on all debt – and that includes a home mortgage, minimum credit card payments and car loans. Borrowers will need to prove assets and income through pay stubs, bank statement and income tax returns, which may prove problematic for the self-employed.
What’s not allowed?
When it comes to QMs, gone are the days of no-documentation loans, 40-year or interest-only mortgages, balloon payments, option loans that made it OK for a borrower to pay less each month than the original monthly payments, or the dangerous negative amortization loans in which the principal balance grew each month because the monthly payments were set low enough to make them affordable. In addition, fees and points can’t exceed 3 percent for loans greater than $100,000.
Lenders have the option to offer either a QM or non-QM loan as long as they can verify that the borrower has the ability to repay the loan. One of the advantages of a QM loan is that it can be purchased or guaranteed by Fannie Mae or Freddie Mac.
What does this all mean for anyone relocating and looking to buy a new home?
For most people seeking a new mortgage, nothing will change. Since the subprime bubble began to burst seven years ago, lenders have been selective about who is approved for a mortgage. In fact, according to the real estate data provider, CoreLogic, only 12.8 percent of new mortgages issued in 2012 did not meet QM standards.
For those who cannot meet the 43 percent threshold one suggestion is to find a lender who offers portfolio loans that are not sold to Fannie Mae or Freddie Mac. These lenders may be willing to make an exception for some borrowers and approve a non-QM loan.
For others, they will either have to reduce the amount of money they are borrowing or pay down their debt. Some might have to delay home ownership, renting in their new location. This could prove especially attractive if it provides lower monthly payments than a mortgage and additional cash each month to pay down debt.
The highs and lows
Forbes is reporting that Don Frommeyer, president of the Association of Mortgage Professionals, is saying that the new rules will hit the Midwest the hardest, since the fees a mortgage broker can charge are capped at 3 percent. He told the magazine that loans between $110,000 and $160,000 – a common price-point for middle-class homes in the Midwest – will translate into fees of $3,300 to $4,800, compared to the Northeast, with its $240,000 median-priced homes yielding fees of $7,200.
But in high-cost areas, some analysts are also worried. Jumbo loans, starting at $417,000, fall under the same 43 percent debt-to-income ratio of other loans. In 2012, according to CoreLogic, most jumbo loan applicants averaged a 45 percent debt-to-income ratio. Of course, a lender can offer a non-GM jumbo loan although it still has the obligation to verify the applicant’s ability to repay the loan.
The Wall Street Journal is reporting that lenders are likely to increase interest rates for 30-year jumbo loans, which will send some borrowers to adjustable-rate mortgages. With ARMs, the interest rate is lower during an introductory period, but may jump after a certain time.
If only we had a crystal ball! One thing is for certain: No one wants to return to 2003, when 29 percent of first mortgages were thrown at borrowers with credit scores less than 620. If QM rules had been in place in 2007, Goldman Sachs estimates that 59 percent of those home loan defaults would never have happened.
Although the full impact of the new laws is still an unknown, many lenders have already committed to offering non-QM loans. Bloomberg reports that Wells Fargo assigned 400 employees to a new group focused on non-QM loans. And according to Forbes, interest-only loans will be offered by the Bank of the West. These are the loans that are not sold to Fannie Mae or Freddie Mac, but instead stay with the bank.
If you are about to relocate and in doubt about how much house you can afford, this handy calculator can help. Within minutes, it determines you debt-to-income ratio and how much of a mortgage you can handle, great information to have before you step inside a bank.