New Loan Requirements For Getting a Mortgage

New Loan Requirements For Getting A Mortgage The number of homes purchased with a home loan has been dropping steadily since May, according to RealtyTrac. Instead, cash is king for many reasons. As mortgage rates began creeping up, some homebuyers started opting to purchase with all cash. And that trend may continue as new loan requirements become more strict. However, for those buyers who do need to purchase a home with a loan, expect to see some changes in the loan requirements as the new year rings in. Here are a just a few of the changes that are going into effect in January 2014. Some of these requirements are already in place by lenders. The new guidelines are being implemented under The Consumer Financial Protection Bureau's Qualified Mortgage (QM) and are designed to help avoid the borrowing catastrophes that caused the housing crisis. The guidelines are what the lenders use to prove borrowers' ability to repay a loan. One of the guidelines is borrowers must have a maximum debt-to-income ratio of 43 percent. Debt-to-income ratios have been in place but the new rules won't allow for any compensating circumstances. That means that not even a significant down-payment or a large cash reserve will be allowed to offset a higher debt ratio. The incentive to follow these guidelines is huge for the lender. If the mortgages don't meet the QM guidelines then the lender will be required to hold the loan as opposed to being sold to Fannie Mae and Freddie Mac. The QM requirements potentially may have lower loan limits for conventional conforming loans. The agency that regulates Fannie Mae and Freddie Mac, The Federal Housing Finance Agency, will delay it's normal adjustment of loan limits from January 1, 2014 to sometime later in the year. 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 remains to be seen in 2014. Fee origination fees will be limited under the QM requirements which could make getting a smaller loan more difficult. Originating 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. The self-employed borrowers will also face tougher requirements with the new QM rules. These borrowers already face tough standards and they'll likely be even more strict in 2014. In the 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 frequently have cash reserves that they rely on to pay bills when the income is off in a particular month. However, even if there is a large amount of money in reserve, this may still be difficult for the self-employed borrower to get a loan approved due to this new "ability-to-repay" QM guideline. Expect to see changes in the loan approval process as the new year begins. However, some of the specific requirements may not be determined until later in 2014.

Your Credit Score - Understand It!

   A Credit Score is a three digit number but this seemingly
harmless number is strongly tied to the amount you can borrow.
It also influences the terms of borrowing. In order to stay on top
of your finances, it is crucial for an individual to thoroughly
understand credit scoring in order to make well-informed
decisions.

Credit Scores: How Credit Bureaus Calculate Them
   There are three main credit bureaus operating in United
States, Equifax, Trans Union and Experian. While every credit
bureau uses a different method for calculating the credit score,
individuals with a long history of paying their debts on time,
using the appropriate types of credit and not exceeding their
available credit lines are most likely to have a good credit score.
The ideal credit score falls in the range of 300 to 850. The
higher your credit score, the higher are your chances of
securing a loan with desirable terms.

   While there are several credit scoring companies, the FICO
score is the most widely used in mortgage application. Several
factors contributing to the FICO score are as follows:

Payment history

   As the highest contributor to your score, individuals with a
habit of paying bills late are most likely to suffer. Since payment
history is a clear reflection of an individual's likelihood of
committing default on financial obligations, it is the biggest
contributor in a credit score calculation at a 35% value.

Outstanding debt

   The next biggest contributor to your credit score is the
amount you owe. If the amount of debt you owe is close to your
credit limit, your score will take a steep decline. Similarly, if you
have outstanding balance on several accounts, this reflects
negatively on your credit score. Outstanding debt has a 30%
value on the score. This factor also takes into account the
amount of debt you owe as compared to the amount of the
amount of debt available.

Length of credit history

   The next most crucial aspect of your credit score is the
length of credit history. They say old credit is the best credit.
This is indeed true because the longer your accounts are open,
the better it is with boosting your score. Length of credit history
has a 15% contribution to the credit score. 

   The length of credit history is further broken down into three
parts which is how long certain account types have been
opened, how long accounts have been opened, and how long
since those accounts have been used. At least one credit
account that is active in the last six months is crucial for a long
and well established credit history.

New credit

   If you have applied for any new credit accounts recently, it
will calculate a 10% value towards your credit score. If you have
opened several accounts in a small time frame, your credit
score will decrease. This can be particularly dangerous if an
individual does not have a very long credit history.

Types of credit

   This is where the types of credit you have come into play.
Finance company accounts, retail accounts, installment loans,
and credit cards accounts are the ideal scenario for a healthy
mix of installment and revolving accounts. This aspect is usually
taken into consideration only when there isn't sufficient
information to determine the score.

What is worse for your credit scores?

   Are you wondering what is worse for credit scores?
Bankruptcy, foreclosure, collection and charged off accounts?
Whether it's a foreclosure on your report, bankruptcy or charged
off accounts, the credit score is going to drop. All three
scenarios show a pattern of not being able to fulfill your
financial obligation and will obviously lower your score.