Get ready for a tougher application process and a more expensive mortgage.
It’s early 2014 and we’re seeing two significant trends in the mortgage industry: higher interest rates and a new set of mortgage rules and regulations now taking effect. These new rates and rules mean consumers are going to have to pay more and wade through a tougher mortgage application process to secure a home loan.
Rising interest rates: Mortgage interest rates climbed more than a percentage point last year, ending 2013 at 4.7 percent. After enjoying years of historically low interest rates, many experts expect this upward trend to continue (it can only go up from the bottom, right?). While 4.7 is still well below average in the last few decades, a rise in interest rates still means more expensive mortgages for consumers overall.
In addition to rising rates, two new mortgage requirements taking effect will likely impact the home buying process for consumers:
Ability to Repay: If you have significant number of outstanding debt - like credit card bills or student loans, you may find the mortgage application process trickier and trickier to navigate. Do you have the income to make monthly mortgage payments? And how does your take-home-pay compare to your outstanding debt? This ratio - known as your debt-to-income ratio - is going to have more and more influence over your mortgage. That means if you’re heavily in debt and not earning a significant amount of money, you may find it more challenging to secure a home loan. Mortgage lenders now have to document and verify all of your debts and income, which means more paperwork, a longer application process and more financial scrutiny.
Qualified Mortgages: In an effort to eliminate risky mortgages and pricey up-front fees, the Qualified Mortgages rule ensures that mortgage pricing and features are more fair and to prevent lenders from taking advantage of consumers. Loan officers are not allowed to push people into higher-interest loans in order to earn a commission. All of this promotes fair lending practices and is good news overall for consumers. But it also means that your debt-to-income ratio becomes all the more significant. As lenders are forced to make smarter loans, they’ll want to extend those to smarter (and more qualified) consumers.