By: Dona DeZube
Published: February 4, 2014
New mortgage rules are pretty clear about what you have to do to convince a lender you’re a qualified mortgage borrower. Meant to measure your ability to repay, the new rules created a list of eight things lenders had to check to make sure you could repay your mortgage.
Those protections help ensure we’re not going to see a repeat of the mortgage crisis any time soon. The new rules also cleared from the market risky loan products like interest-only and balloon loans. But if you can’t meet any of the eight standards you’re going to find it harder to get a new mortgage or refinance your existing mortgage.
The NATIONAL ASSOCIATION OF REALTORS® predicts the changes will slice about 5% to 7% of borrowers out of the market.
Where do you turn if you’re in that 5% to 7% or you like your balloon loan and want to refinance into another balloon loan?
The fine print in the new rules created some exemptions that you can use to try again if you don’t meet one or two of the eight qualified mortgage checks, or if you want to go with a loan product that the rules discourage lenders from making.
1. Your State Housing Finance Authority
State Housing Finance Authorities specialize in helping first-time and low-to-moderate income homebuyers and homeowners. They’ll often give you a below-market interest rate or the option of putting down as little as 3%.
In exchange, you’ll likely have to agree to complete a financial education course and prove every penny of your income.
Historically, HFAs have had much lower rates of late payments and foreclosures than for-profit lenders, so they’re exempt from the rules.
2. An Itty-Bitty Bank
Banks and credit unions that have less than $2 billion in assets and make 500 or fewer first mortgages don’t have to follow the same rules as larger lenders.
That’s because they didn’t make the risky loans that led to high foreclosure rates during the mortgage crisis. Plus, they tend to hold on to the loans they make (rather than selling them to investors). That makes it easier for the bank to work with customers who run into financial trouble.
Small lenders can charge higher fees and interest rates than big banks, which they need to do if you have a tiny loan amount, because some fees, like a title search, cost the same no matter how big or small your loan is.
If, for example, you had a $20,000 mortgage, the fee cap would limit you to $1,000 in fees, which probably isn’t enough to cover a title search and appraisal. Although the bank would still earn interest on your loan, it would have to pay the fees for you — and no bank wants to do that.
Some small lenders can still make balloon loans, where you owe one big payment at the end of your loan. A balloon loan has a lower monthly payment than a regular mortgage loan where each month you pay back some of the money you borrowed instead of just interest.
The catch is that the small lender has to hold on to your loan for at least three years and can’t sell it into the secondary market.
So you’ve got to persuade the bank that your mortgage is a good investment. Small bankers can be very conservative lenders, which is another reason they didn’t end up with a lot of foreclosures on their hands during the real estate crisis.
Right now, any lender who meets the size rule can use the small lender exemption. Starting Jan. 10, 2016, only small lenders in rural underserved areas will get to use the exemption, so don’t delay trying this avenue unless you live in a sparsely populated place.
3. A Government-Guaranteed Loan
The new rules set a clear line for how much of your income, max, you should be using for debt: 43%. If you’re above that limit because you have too much debt or not enough income, there’s a work-around.
You can go over the 43% limit if your loan is guaranteed by Fannie Mae, Freddie Mac, the Federal Housing Administration, the VA, or the U.S. Department of Agriculture’s rural housing loan program.
4. Community Development Nonprofits
Nonprofit lenders who work with low- and moderate-income borrowers don’t have to follow the new mortgage rules. As long as they don’t make more than 200 loans a year, they can create special loan programs to help the people in their community.
Community Development Financial Institutions set up shop in areas undergoing revitalization. They target a particular community for assistance, including homebuyer incentives. CDFI lenders also don’t have to follow the new mortgage rules.
5. Homeownership Preservation and Foreclosure Prevention Programs
If you’re underwater on your mortgage, meaning you owe more than your home is worth, you can get still a loan from a foreclosure prevention program or a homeownership stabilization organization. Because these groups have a history of knowing how to help troubled homeowners, they don’t have to follow the new mortgage rules.
6. A Safer Loan
If you’re in a dangerous, unfair loan right now and you want to refinance into a safer loan, your lender doesn’t have to follow the eight standards when it gives you a better loan. There’s an exemption from the ability to repay standards when a lender is moving a borrower out of:
- An adjustable-rate mortgage that’s about to adjust to a much higher payment.
- An interest-only loan.
- A loan with negative amortization (meaning the amount you owe can go up even if you make all your payments).
Your new standard loan:
- Has to have a fixed rate for the first five years.
- Must lower your monthly payment.
- Can’t have fees of more than 3% of the amount you’re borrowing.
7. A Work-Around
If you’re rich enough that your bank has assigned you a personal wealth manager, that’s the person to talk to when it’s time to refinance. Your bank will want to keep you as a customer and will find a work-around to fund your loan.
For example, if you’re using more than 43% of your income for debt but you can show you have millions in assets, your personal banker will make the case that you’re quite able to repay your mortgage even though you don’t meet the debt-to-income rule.
8. Another Kind of Loan
The new mortgage rules don’t apply to all loans. It specifically doesn’t include:
- Open-ended loans.
- Timeshare loans.
- Reverse mortgages.
- Temporary loans, including bridge and construction, and the construction phase of construction-to-permanent loans.
- Loans from the bank of Mom and Dad.
If one of those types of loans will work instead of a mortgage, you won’t have to meet the new mortgage rules.
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