Last month your credit score was 735. You checked it again this morning, and it’s 20 points lower. What’s up?
Late credit card or loan payment
Larger than normal credit purchases
An unpaid account goes to collection
You applied for a credit card
You closed a credit card account
The First Time Buyer
The Move-Up Buyer
The Immigrant Buyer
Average U.S. rates for fixed mortgages rose slightly this week but remained near historically low levels.
With big changes coming to the mortgage industry at the beginning of next year, many consumers will want to evaluate their homebuying plans. Regulations drafted by the Consumer Financial Protection Bureau will change the definition of a qualified mortgage for any loan applications received on and after Jan. 10, and many consumers may find themselves unable to meet the new requirements.
Qualified mortgages are loans that meet certain standards designed to ensure that borrowers are highly likely to be able to pay back the amount in question. Facing this challenge, it's up to the hopeful homeowner to improve their chances of mortgage approval by doing the necessary research, improving their credit profiles and meeting the qualified mortgage standards well in advance of filling out loan applications.
It's important to meet qualified mortgage standards because government-sponsored enterprises, known as GSEs, like Fannie Mae and Freddie Mac have said they won't buy non-qualified mortgages starting next year, said Joshua Weinberg, senior vice president of compliance with First Choice Lending/Bank. Fannie and Freddie don't lend to homeowners directly, rather they purchase mortgages from banks and then bundle them into securities and sell those securities to investors.
For lenders that originate mortgages with the intention of selling them to the GSEs, as many do, originating non-qualified mortgages won't be feasible. Other lenders own the mortgages they originate, meaning they don't have to worry about selling them to GSEs, and such larger portfolios could probably take on non-qualified mortgages.
What's Changing? Mortgages must pass tests of sorts to meet the standards of a qualified mortgage: The APR must be within 150 basis points (1.5 percentage points) of the annual prime offer rate, the loan term cannot exceed 30 years, points and fees cannot exceed 3 percent of the loan balance and there can be no negative amortization or interest-only payments. Under these conditions, the mortgage qualifies for safe harbor, meaning the lender is not at risk of being sued by a borrower who is unable to repay the loan.
There's a class of loans called higher-priced qualified mortgages, in which the APR exceeds the 150 basis-point limit, and in those cases, the loan falls under rebuttable presumption, meaning the lender is assumed to have complied with ability-to-pay requirements, unless a borrower or attorney argues otherwise. Loans with rebuttable presumption will likely come at an additional premium, said Cameron Findlay, chief economist at Discover Home Loans, though the price of that premium is unclear at this point.
The ability to repay comprises a series of requirements that must be met by the borrower and verified by the lender, including income and debt levels. All of these CFPB regulations are aimed at protecting consumers from mortgages they can't reasonably expect to repay, because such faulty loans triggered the recent financial crisis. Given these limitations, and some new restrictions on lenders that also go into effect in January, some have suggested that consumers may find themselves struggling to acquire a mortgage.
Weinberg described it this way: Originating a mortgage has been a process that blends science and art. The science includes the regulations that give clear guidelines for what does and does not meet qualified mortgage standards. The art comes in when an originator decides to approve or deny a mortgage application, even if a borrower doesn't meet every requirement in the book, because his or her experiences can give important context to a case that numbers and rules cannot.
"With this QM rule we're seeing an elimination of the art and a focus on the science," Weinberg said. "The way the points and fees will be calculated is now a pretty defined standard. My gut says because of the shrinking art component and the emphasis on the science, fewer people are going to qualify for loans."
While the new regulations are beyond consumer control, there are several things potential homeowners can do to prepare for buying residential property in 2014.
1. Ask Questions: If this all sounds a bit confusing, don't worry. You're not alone. Both Findlay and Weinberg acknowledged the complexity of the new rules and said there's confusion among lenders. For potential homeowners who don't understand what these changes mean for them, there's no shame in asking someone to explain them.
There are a lot of components to mortgages that first-time homebuyers may not be familiar with. Say a lender instructs you to reduce your debt-to-income ratio — that means how much of your income is tied up in student loan payments, collections accounts, judgments and other existing loan obligations. You've just learned that points and fees can't exceed 3 percent of the loan balance, but what's a point?
A point, for the record, is prepaid interest on the loan, with one point equal to 1 percent of the loan. If a borrower would rather have a lower interest rate than the one they're offered then they can pay points to lower that rate.
There's bound to be something that confuses the borrower, and no one should enter into such a large financial decision with uncertainty. Ask a lender to explain it to you, but understand that the lenders are nailing down the new processes, as well. "It doesn't bode well for the consumer when there's this confusion," Findlay said.
It's important to shop around for mortgages, and consumers should know that they can concentrate their mortgage search into a few weeks in order to minimize the impact on their credit scores. Inquiries are a major factor in your credit scores, and too many inquiries can hurt your credit. Mortgage inquiries made within that short period (which varies by credit scoring model) will count as a single inquiry on their credit reports, and because multiple inquiries would normally ding credit scores, this allows consumers to find the best offer without harming their credit profiles. If you want to see how inquiries are affecting your credit, you can look at your free Credit Report Card, which grades you on important credit score factors and gives you free credit scores.
2. Tackle Debt: If you have debt, you should try to reduce it, and this is true for all consumers, not just those looking to buy a house. Potential homeowners, however, should be extra motivated to conquer their debt: Under new ability-to-repay requirements necessary to attain a qualified mortgage, a borrower's debt-to-income ratio must be 43 percent or less, including the potential mortgage payment.
"Not only do we consider the debts that show up on your credit report, but we have to look at debts you may expect to pay in the future," Weinberg said, giving the examples of child support and student loans in deferment. "They are also going to need to be comfortable and aware of managing that debt. They are going to be asked questions about that."
Whether you're looking to buy a home next year or in two years, make a plan to manage debts now. It can only help.
3. Start the Paperwork: Though these new requirements impact consumers, they also affect lenders, and no one wants to be the first to screw up. The ability-to-repay measures require a lot of documentation, which will need to come from you, the applicant.
"We're really needing to get a very holistic perspective on the borrower in order to complete the analysis necessary to meet compliance," Weinberg said. Borrowers should ask a lender exactly what they'll need to provide, and in order to answer lenders' questions, they should also take stock of their credit profile.
Consumers are entitled to a free annual copy of their credit report from each of the three major credit bureaus — Experian, Equifax and TransUnion. That's three credit reports, so it's smart to review at least one before starting the homebuying process.
No one is sugar-coating these changes — they're a lot to handle. Changes are common in this post-crisis climate, so the best consumers can do is ask questions and do their part to prepare and educate themselves. "If we're making better loans, and the consumers are protected better, that's better at the end of the day," Weinberg said.
After a surge in home values in most cities in the past year, prices will increase more slowly in 2014.
The housing recovery has pushed up home prices nearly everywhere. In the past year, home prices rose in 225 of the 276 cities tracked by Clear Capital, a provider of real estate data and analysis. Prices nationwide increased by 10.9 percent, pushing the median price for existing homes up by $30,000, to $215,000. For people who have waited to sell their home or refinance their mortgage, that's good news.
Rising home prices in Seattle enabled Mike and Kristin Litke to refinance their first mortgage last summer and pay off a second mortgage that had an 8.2 percent interest rate. The Litkes, who bought their three-bedroom, 1.5-bath home for $512,500 in 2007 at the peak of Seattle's housing market, had used the second mortgage to avoid paying private mortgage insurance. In 2010, just as home prices in the area hit a trough, they refinanced their first mortgage to a 30-year fixed rate of 4.375 percent but were stuck with the second mortgage because they didn't have enough equity to do a "cash-out" refi.
This time, however, their home appraised for $521,000, allowing them to refinance into one 30-year, fixed-rate mortgage of $416,800 at 4.25 percent. They have reduced their monthly payment by $360, giving them some wiggle room in their budget and providing an infusion of college-savings funds for their kids: Stephen, 3½, and Stella, 10 months.
In 2013, a sense of urgency drove traditional buyers hoping to take advantage of still-affordable home prices and historically low mortgage rates. Buyers found selection limited and were often forced into bidding wars with investors and other buyers who paid cash. Sellers reaped the rewards in terms of quick sales, often above the asking price.
Almost half of the cities tracked by Clear Capital experienced double-digit increases in home prices, led by Las Vegas, with a gain of 32 percent. Such spikes reflected a continuing "correction to the overcorrection," says Alex Villacorta, vice-president of research and analytics for Clear Capital. Buyers and investors rushed in to snap up homes with prices that had fallen too far. Homes continue to be affordable, despite recent run-ups — on average, prices are still 31.5 percent below their 2006 peak. The percentage of monthly family income consumed by a mortgage payment (assuming a mortgage rate of 4.1 percent) is just 15.6 percent, on average, compared with 23.5 percent in mid 2006.
"Houses are very cheap," says David Stiff, principal economist at CoreLogic, a property and mortgage-data analytics company.
Market observers agree that home prices will rise in 2014, but at a slower, more steady pace compared with historical trends. Clear Capital forecasts that home prices nationally will rise by 3 percent to 5 percent in 2014, about the historical average. Kiplinger expects an increase of 4 percent.
"The most notable thing about 2014 will be how un-notable 2014 is," Villacorta says.
Meanwhile, the Conference Board, a nonprofit association of businesses, found that the percentage of consumers who intend to buy a home in the next six months was the highest since 2000. Adding to the push: pent-up demand among young people who, hampered by lack of jobs or insufficient income, have been living in their parents' basements or sharing apartments with roommates. Celia Chen, a housing analyst with Moody's Analytics, says Moody's expects the economy to expand enough in the coming year to enable young people to begin moving out. They'll probably rent first, but low vacancy rates and higher rents will prompt some renters to move on to homeownership.
As home prices continue to rise, more owners who had been underwater — meaning that they owed more on their mortgage than their home was worth — will emerge from the sidelines and start selling and buying homes. CoreLogic reports that almost 3.5 million homeowners were lifted out of negative equity between the end of 2012 and mid 2013. Nevada, Florida, Arizona, Michigan and Georgia have the highest shares of underwater homeowners.
A sellers market
In the past year, sales of existing homes and condos rose by 11 percent, to 5.29 million — almost the highest level in four years. The National Association of Realtors expects sales to remain about the same in 2014. Sales nationally have increased across all regions and in all but one price category, signaling a broad-based recovery.
Although sales of entry-level homes (priced at $100,000 or less) have fallen by almost half in the past year in the West, they're still rising in the Northeast, where the job recovery has lagged behind other regions. Sales of homes priced between $750,000 and $1 million have risen the most.
"A consistent stock market recovery for a prolonged period has opened up the wallets of upper-income homeowners," says Lawrence Yun, chief economist for the National Association of Realtors.
Nationally, the supply of homes for sale stands at five months' worth. (Months' supply is a measurement of how long it would take to sell everything at the current pace of sales. A market balanced between buyers and sellers has about six months' supply of homes.) The current level slightly favors sellers, but in many cities inventory is much tighter. For example, the Washington, D.C., suburbs of Montgomery County, Md., and Northern Virginia had about two months' supply in September. Yun says the housing market has moved toward a shortage that will persist through 2014.
Why is inventory low?
In some cities, institutional investors have been scooping up properties to rent out. Plus, builders cut way back on new-home construction during the bust, and homeowners who bought at the top of the market are still reluctant to sell until they can recoup more of their investment. Some are still underwater, unable to pay off their mortgage with what they'd get for their home.
In Oakland County, Mich., in suburban Detroit, agent Melanie Bishop says home prices fell so far during the economic downturn that even longtime homeowners reaped little or no profit when they sold. But with the housing market's rebound, sellers' prospects have improved. She recently helped Corey and Suzy MacDonald sell the four-bedroom, 2.5-bath home in West Bloomfield that they bought in late 2006 for $272,000.
In the spring of 2012, Corey MacDonald became self-employed, and the couple decided to relocate to Florida. They listed their home for sale at $265,000, just enough to pay off their mortgage and expenses. The best offer they received was $245,000, so they decided to postpone their move and try again later. Last summer, they listed the home for sale at $289,900. On the first day, they received an offer of $310,000. "It was a perfect deal," MacDonald says. He ultimately took a job in Atlanta, and the couple used the proceeds from their Michigan sale to put down 20 percent on their next home.
The influence of investors will wane as the low-hanging fruit (including foreclosures) disappears in 2014. Once, whole cities were ripe for the picking — such as Cape Coral, Fla., and Phoenix in 2012, as well as Las Vegas and Atlanta in 2013 — but investors must now dig deeper at the neighborhood level, says Villacorta. That's a job probably best suited to smaller numbers of local investors who know their markets best.
Where will new supply come from?
Most people who list their homes for sale expect to buy another one, so it's a wash in terms of net inventory. According to the National Association of Home Builders, whose members retrenched during the bust, just less than half as many homes were started this year as in a normal market. NAHB forecasts that a normal pace of housing starts won't resume until late 2015. Tight credit, land and labor, as well as rising costs for materials, are constraining builders.
Distressed properties are still adding to the supply of homes nationally, but foreclosure filings are falling. Fewer homeowners are losing their homes as the economy improves, home prices (and home equity) rise, and lenders agree to more short sales (homes sold for less than their owners owe on their mortgages).
"We're in the home stretch of getting through the foreclosure crisis," says Daren Blomquist, vice-president at RealtyTrac, which monitors the foreclosure market. "But we won't cross the finish line, with filings back to pre-crisis level, until early 2015."