Getting a mortgage isn’t easy… heck, it’s not even simple. Since the housing meltdown last decade, the Government decided to get further involved, which means that things got very complicated.
Back in 2005, the typical mortgage loan application file would only be about a hundred pages or so, but now files are more jam-packed than ever, with income and asset records, tax returns and other financial documents that can make an application look more like a copy of War and Peace.
Let’s take a look at what it currently takes to get a mortgage:
How many Americans fit the above profile? Well, it’s about to get worse.
How Banks Will Get More Strict With Their Lending
The packets are only going to get larger. Beginning Jan. 10, 2014, banks will now have to ensure that monthly mortgage payments are affordable, thanks to the Dodd Frank Act, and the failure to do so carries some strict penalties.
The “Ability-to-Repay” regulations are designed to prevent lenders from approving mortgages for borrowers with questionable credit scores & poor debt-to-income ratios, and steering them into adjustable-rate loans or interest-only loans with little or no money down.
Instead, they want to loan to only ‘qualified’ borrowers.
To comply, lenders will probably become more strict on their debt to income ratio. Yahoo! Finance predicts that the requirement will be around 38%. Lenders will carefully examine and double check pay statements, bank records, tax returns and other paperwork provided by borrowers… all of which will make a slow & difficult process even more complicated & time consuming.
And If You’re Not a W2 Employee…
If you’re self-employed, you can pretty much forget about qualifying for loans. Loans with reduced documentation were a good fit for self-employed, contractors or business owners, but regulations have eliminated those types of programs. The qualified mortgage rules all say that borrowers need to prove their ability to repay a loan based on cash flow, and this hurts investors who have a high net worth & lots of equity in their home.
So Doctors, Attorneys, Business Professionals, Real Estate Investors, Accountants, etc… who are well off and have equity in their homes, perfect credits scores and a thriving business cannot get a loan because they don’t receive a weekly paycheck.
My Experience Getting A Mortgage
Sure, there are those that say there are safe harbors and there are some allowable exceptions that will be allowed by lenders. But these exceptions will most likely not be made because Fannie & Freddie will not be will to purchase loans that are not qualified. And lenders will be unwilling to write loans that they cannot sell to Fannie & Freddie.
The fact is that the already dwindling pool of potential borrowers that exist in 2013 will decrease in 2014.
Of course, the bi product of making things more complicated and more expensive will ultimately weed out the smaller banks. Fewer smaller banks will reduce competition, which is never a good thing for consumers. Ultimately, less competition will lead to higher fees and higher mortgage rates, which will hurt the housing market and particularly affect low- to moderate-income borrowers who have a harder time affording a loan.
If the exit strategy for your real estate business revolves around your buyer obtaining a mortgage, then you may want to consider other alternatives. If you’re unable to adapt your real estate strategy to the market, you will fail in 2014.
What options do you have in real estate investing strategies? Click here to register for my next webinar: http://REIMaverick.com/more-info.
