Some Loans Will be Harder to Get After Jan 10, 2014

The “Debt to Income Ratio” for FHA and even conventional loans is about to get harder to reach and you need to know about this.

First, debt to income ratio is the ratio of debt you are allowed to take on (total debt) as a portion of your income. Your home loan is one part of this debt –also to include credit cards, other loans and car payments, etc.

If your overall household borrowing is at more than 43% when Friday, January 10th, 2014 comes, new lending rules established by the CFPB (Consumer Financial Protection Bureau) exactly one year prior (Jan. 10, 2013) will limit you from taking out a mortgage or refinancing an existing one.

This is HUGE.

How much harder will it be? About 14% harder for getting an FHA loan and about 2% harder for getting a conventional loan.

Right now, FHA borrowers can have a debt to income ratio of 57%. That will go to 43% in January.

Conventional borrowers can have a debt to income ratio of 45%. That will go to 43%, as well.

Let me say it again: This is a HUGE change.

Enter my good friend and frequent contributor to my quarterly Market Briefings, Jeannie Bolger, Sr. Loan Officer (Nova Home Loans, Phoenix):

“I would suggest homebuyers who are looking to enter the home buying market should get pre-approved NOW to see where they will fall in the qualifying ratio “Bucket”.  If their current qualifying ratios are 47% they are going to want to be pre-approved (not pre-qualified) prior to Jan. 10^th, 2014, otherwise they may be limiting the sales price of home they will qualify for.”

A Little Background
The Ability-to-Repay rule made it so that most new mortgages must comply with basic requirements that protect consumers from taking on loans they aren’t able to repay. Lenders are assumed to have complied with the Ability-to-Repay rule if they issue loans that meet certain requirements (including prohibitions or limitations on the risky features that harmed consumers in the recent mortgage crisis). Find the right lender, someone who knows what can and can’t be done with a given file, and you’ll give yourself a huge leg up.

Although the decision was made this past January, the adjustments to the rule weren’t known by the public until May 13th of this year, when it was first reported in a press release by CFPB. US News & World Report commented on the coming change on August 30th.