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Qualified Mortgage Rule Noted Effects

We are nearly a month into the Consumer Finance Protection Bureau’s (CFPB) rules for Qualified Mortgage (QM). I found a helpful guide to the new rules here: CFPB Whitepaper on ATR and QM. So far, the primary issues we are working through deal with upfront private mortgage insurance. This is required for conventional loans greater than 80% loan to value, or loans with less than a 20% down payment. Part of the QM rule says that all origination charges, including mortgage insurance, must be less than 3% of the loan amount for loans greater than $100,000. The confusion is in regards to refundable versus non-refundable mortgage insurance. The CFPB indicates that refundable doesn’t count unless it exceeds the FHA upfront amount of 1.75%. Many of our investors are requiring that we count the upfront mortgage insurance whether or not it is refundable. Before giving an example of how this can affect a home buyer, let’s review the benefit of upfront mortgage insurance.

For example, a $200,000 loan amount on a purchase price of $210,526 (5% down payment) would require mortgage insurance. On conventional loans, 5 options exist for this mortgage insurance: The buyer can pay it monthly, part monthly and part upfront, all upfront, the lender can pay it (by building it into the interest rate), or the seller can pay it through seller’s contribution (the seller isn’t actually paying it, rather it is built into the purchase price and financed). The cheapest option over time of these 5 is buyer paid upfront. Here’s why: the lowest upfront single premium amount is 1.7% of the loan amount. The cheapest monthly premium is .56% annually. Since PMI is required for 5 years, that means the annual cost x 5 is over 2.5%. So, by paying the MI upfront you recoup your money in a little over 3 years, never have to pay the monthly mortgage insurance as long as you have the loan, and don’t have to worry about getting the PMI cancelled.

Why this is important: if the 1.7% counts into the 3% maximum fees calculation, and the lender charges the customary 1% origination fee (I know some lenders advertise no origination fees – they are simply building it into the rate instead), and the underwriting and processing costs exceed .3% (which they generally would or be close to exceeding that), then the total fees would exceed 3% and the buyer would not get the advantage of having the option of doing one-time, upfront mortgage insurance. It also makes no difference if the lender or seller pay this, it still has to be counted into the 3%. Our solution to this is to move to a split premium (buyer paid part monthly, part upfront), or remove the origination fee. The mortgage and mortgage insurance industries also continue to press the CFPB for clear definition on excluding the refundable upfront premium from the calculation.

The other noticeable change has been in underwriting. Thus far, the underwriters have indicated that they will examine income documentation under a modified lens, or in other words some people that would have qualified before will no longer. The best answer for a home buyer: contact our team to review your scenario. We explore every option available to find the best solution for you and do the underwriting upfront (no pun intended!) to eliminate surprises.

 

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Qualified Mortgage Rule

Upcoming Changes to the Qualified Mortgage Rule

The primary impact home buyers and home owners will see from the Qualified Mortgage (QM) rule is the ability to repay provision. Here in Minnesota, we have been ahead of the national curve due to changes made to state law in 2007 and 2008. Mortgage originators have been required to document a borrower’s ability to repay a mortgage by comparing their income documentation and outstanding liabilities from the credit report and total housing expenses. However, the specific definition of “ability to repay” wasn’t provided, other than to say “reasonable.” The standards will become more strict.

Read the state law here.

Ability to Pay and DTI

The new ability to repay federal law comes with a definition stating that a borrower does not have the ability to repay a loan if their total debt to income ratio (DTI) exceeds 43%. Today, we can get loans approved with a much higher DTI, which for some borrowers does make sense and they do have a “reasonable” ability to repay the mortgage.

However, the primary impact of the new rule will limit everyone to the same DTI regardless of “reasonable” or not. Critics of “reasonable” will state that no one should have a DTI over 43% as that is too high, but they fail to consider a wide array of circumstances where the DTI is not a valid test of ability to repay.

Here are a few examples: self-employed persons, commissioned employees with less than a 2-year history of commission, non-borrowing spouses, roommates that pay rent, part-time employees, and other situations where a “compensating factor” applies but the total income picture cannot be used to qualify the borrower. When reviewing these scenarios under the “reasonable” microscope, it sometimes makes sense to approve a loan with a higher DTI, knowing that they strong ability to repay regardless of the ratio.

The current Consumer Finance Protection Bureau (CFPB as created by Dodd-Frank 2010) rule allows for a “temporary” exception to the 43% DTI rule when the loan is eligible for sale or guaranteed by either Fannie Mae or Freddie Mac. It doesn’t say how long this temporary exception applies, and most FNMA/FHLMC approvals are currently limited to 45% anyway (except HARP refinances and other applications with very strong qualifying criteria).

Read the complete QM Rule here.

Mortgage loan officers will adhere to the Qualified Mortgage rule as it gives us “safe harbor” from future liability if the loan fails to perform (or the borrower defaults, depending on how you look at it). No loan officer will want to be sued because their client could not or did not pay their mortgage payment.

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Economic Event-Related Mortgage Foreclosure

FHA now allows financing approval with bankruptcy or foreclosure at least 12 months old.

The lender must verify and document that:

  • A minimum of twelve (12) months have elapsed since the date of foreclosure or deed-in-lieu
  • The foreclosure or deed-in-lieu was the result of the Economic Event.
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President Obama Reflects on Steve Furlong’s Question

 

President Obama discusses the future of Fannie Mae and Freddie Mac. Steve Furlong had his question directly answered by the President!

See the full webcast here:
http://www.whitehouse.gov/photos-and-video/video/2013/08/07/president-obama-answers-your-housing-questions-zillow

The question was: “President Obama: If Congress is successful in scaling Fannie Mae and Freddie Mac down, what model fills the gap?”

His answer was that less government involvement in the mortgage securitization process is needed. He is searching for effective ways to spur private investment in mortgage securities, but to gradually make any changes so as not to harm the delicate recovery of the housing market.

Our take on this is one of optimism for improved financing options and flexibility as the current market is restrictive for many clients in being able to obtain financing. We are up for any challenge in helping to guide families home and work with every client until the end result is achieved – home ownership!

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Real Estate Professional Roles

List of Real Estate Roles

Mortgage Specialist

This finance professional prequalifies you for the mortgage. He/she reviews your income and ability to afford a home, credit history, and the subject property to insure the loan meets current guidelines. He/she can discuss the financial advantages of home ownership vs renting. May be helpful in helping you create a budget, discuss down payment options, reviewing mortgage guidelines and programs if you ask. Be sure to check for an NMLS certification indicating that the individual has been reviewed by the State of MN for licensing.

Title Agent

Insures ownership of the property is legally transferred and without defect. This person reviews any liens that may be on the property, delivers documents to the county to record ownership and the mortgage (if applicable) and administers the closing of the purchase and mortgage.

Realtor

A Realtor helps you in locating and negotiating the purchase of your new home. He/she is essential in not only locating the right home for you, but creating strategies in the offer process, getting the most for your money, and coordinating the transaction on your behalf. It is important to work with a Realtor that comes with a recommendation and is reputable.

Property Insurance Agent

The Insurance Agent provides protection of your home and belongings for your family. The Agent will review the property appraisal, discuss with you the personal belongings that need to be insured and comprise a policy that covers you where you need it. A great Agent will review the entire policy with you, let you know what is not covered and will provide options for additional insurance. Property insurance is not only required when you have a mortgage, but is essential for the security of your home and your financial stability.

Appraiser

A property appraiser determines the value of the property for lending purposes and helps to insure that you are paying a fair price. The appraised value represents the local market by reviewing similar properties that have sold recently. The appraisal process today is an anonymous one, meaning the appraiser is independent and has no influence from the Realtor or Mortgage Specialist, insuring that you are getting a truly independent estimate of market value.

Inspector

It is a great idea to have the home inspected within the allowed time on the purchase agreement, typically 10 days from the date on the agreement. An inspection determines the condition of the plumbing, heating, cooling and electrical systems and the structural integrity of the property. They are licensed and trained to look for defects and point them out to you, the buyer, to insure that the property you are buying is of good condition.

County Assessor

Bloomington is in Hennepin County, who is responsible for administering property taxes. In order to reduce the tax on your home, you will need to homestead your property with the Assessor. You can do this, along with access other valuable services, at the Bloomington Assessors Office at 1800 W. Old Shakopee Road.