Under new rules, mortgage loans are supposed to be less risky, but are they also harder to get, especially for the self-employed? NY1's Tara Lynn Wagner filed the following report.
New federal rules for getting a mortgage are now in place, and while most potential borrowers won't feel the difference, some will have a harder time getting financing.
That's because banks will now be heavily scrutinizing your ability to repay. For one thing, you'll need to show two years' worth of sufficient income, which could be a challenge for the self-employed.
"Because their tax returns are more technically creative, I would say," says Melissa Cohn, executive vice president with the Manhattan division of Guaranteed Rate. "If you really want to be able to get financing, you're going to have to take two years where you take as few deductions as you can and show two years' worth of tax returns showing sufficient income to qualify for the mortgage."
Ability to Repay isn't just about income. It's also about expenses. Banks will be looking at your debt to income ratio, essentially adding up all of your financial obligations at their highest possible level.
"Student loans, car loans, credit cards, alimony, child support," Cohn says.
All of that plus your future mortgage and maintenance costs can't exceed 43 percent of your income in order for the loan to be considered a qualified mortgage. In addition, the terms can't be longer than 30 years, they can't feature interest-only payments or balloon payments, and points and fees can't be higher than 3 percent.
"The banks that are sticking to the pure QM that will give you the best rates, you have to totally qualify within all of the guidelines," Cohn says. "There are banks that will fall out of those guidelines, but they generally will charge you a higher rate for the fact that they are making a more risky loan."
Cohn doesn't expect the new rules to have a huge impact on the market since many banks have already adopted the new standards. Her company, Guaranteed Rate, looked back at three years' worth of loans and found that 99 percent of them fall into the new guidelines, which aren't meant to make it harder to get a mortgage, just less risky.
"The good news is that there are no changes in terms of the credit score requirements," Cohn says. "So you can have a 650 credit score, and if you qualify every other way and the bank is willing to make the mortgage, you've got it."
For more information on the new rules, visit consumerfinance.gov.