Qualifying for a mortgage could become more difficult in 2021

By Sabrina Karl

Between 2014 and 2018, more than 3 million homebuyers were able to secure mortgages due to a special provision called the “qualified mortgage patch”. But the Consumer Financial Protection Bureau has announced it will let the provision expire after 2020, leading to reduced access to credit for millions of potential homebuyers.

The regulatory patch enabled Fannie Mae and Freddie Mac to purchase mortgage loans where the borrower’s debt-to-income ratio (DTI) — the percentage of the borrower’s annual income required to cover their debt obligations — exceeds the industry standard of 43 percent. A resulting 19 percent of Fannie and Freddie mortgages from 2014-2018 were made possible by the loophole.

The CFPB and other proponents of ending the patch argue that it will help protect against a housing crisis by preventing homebuyers from buying more house than they can afford. They further argue that a DTI threshold of 43 percent is already high, compared to the 1990s average of 36 percent.

But opponents of the policy shift cite research showing borrowers with higher debt-to-income ratios are not less likely to repay their loans, and that sunsetting the provision will result in millions of Americans being cut out of the housing market despite having demonstrated their ability to repay.

Mike Calhoun, president of the Center for Responsible Lending, argues that credit scores, down payment size, and mortgage type are all stronger indicators of repayment behavior than DTI.

Also up for debate is the role of the patch on housing prices. Proponents of closing the loophole argue that allowing borrowers to buy more house has led to an increase in home prices, and that removing that patch will ultimately benefit homeowners by improving home affordability. Meanwhile, critics contend that house prices have more to do with housing supply than lending practices.

How much will a lower mortgage rate save me?

By Sabrina Karl

When shopping for a mortgage, you’ll be faced with a sea of rates. But while it’s straightforward to decipher that 3.5 percent is a better rate than 4 percent, it’s not always easy to translate how that will affect your mortgage payments.

A quarter or a half percentage point may not seem like much difference, but it can add up in terms of how much you’ll pay over the course of a year. Take a typical mortgage of $200,000. If you opt for a 30-year fixed mortgage at 4.00 percent APY, your monthly payment for principal and interest will run approximately $955.

If you can qualify for a mortgage at 3.75 percent instead, so a quarter point lower, your payment will drop to around $925. Over the course of a year, you’d end up with about $350 more in your pocket than with the 4 percent loan.

What if you find an even better deal, or rates drop while you’re shopping, and you can score a 3.5 percent mortgage? Your payment would be lowered to under $900 and you’d save another $335 per year. That makes the savings from a rate of 3.5 percent vs. 4 percent (i.e., a half point decrease) about $685 a year, or $57 a month.

This is just one example, but if you borrow more, the impact of a half or quarter percentage point will become more significant. Borrow less, and the impact is more minimal. Likewise, if you borrow for a shorter period, such as a 15-year fixed mortgage, the rate impact will also be lower.

Making the right mortgage choice for you will take numerous factors into account, but it’s always wise to use a mortgage calculator to ensure you understand how different rates and terms will affect your payments.

What documents will I need to get a mortgage?

BY Sabrina Karl

Applying for a home loan may be one of the more paper-intensive processes you’ll go through in life. Fortunately, much of what you need you’ll already have on hand or can easily access.

The documents mortgage lenders require generally fall into three categories: those documenting your income, your debts, and your assets. In addition, a variety of miscellaneous documents may be necessary given your situation.

At the top of the list is documentation of your current income, as well as how much you earned the past two years. Lenders will typically want to see your most recent two tax returns.

If you work for an employer, you’ll additionally need to present your latest W-2 form and last two pay stubs, as well as the names and addresses of any other employers over the last two years. Meanwhile, the self-employed will need to provide a year-to-date statement of profits and losses, as well as two years’ worth of 1099s and tax returns documenting the self-employed income.

The next bucket of documentation concerns debts. You’ll need to list all of your current debt balances and monthly obligations, including auto loans, student loans, and credit card balances. You won’t need to provide statements, though, as the lender will verify information against your credit report.

Next comes asset documentation. This includes the last two months of statements for any bank, CD, retirement, and investment accounts you hold, as well as for any life insurance policies with a cash value or owned real estate.

Lastly, various miscellaneous documents may be required given your specific situation, such as a letter confirming any received gift money is not expected to be repaid, proof of one year’s rent payments if you are a renter, or your divorce decree if you’ve divorced.

Many in the dark on what their homeowners insurance covers, and whether they’re getting a good rate

By Sabrina Karl

Although the vast majority of homeowners carry homeowners insurance (if you have a mortgage, it’s required), only about a fifth of homeowners have reviewed their policy to understand what it covers, or have shopped around for a good policy price.

A new ValuePenguin survey of 1,849 homeowners with homeowners insurance found that almost half (47 percent) said they don’t know what their policy covers, and 18 percent went as far as saying they have never reviewed their policy.

Meanwhile, although 64 percent reported they review their policy annually, only 71 percent said they feel confident in their understanding of what’s covered.

A common misconception turned up by the survey is the belief that flood damage is covered. One in three respondents (34 percent) believe their policies cover flooding, even though most policies do not. Among millennials, almost 50 percent have this misconception.

Many homeowners may also be paying more than they need to for coverage, since only a fraction are shopping around for the best rate. Approximately a fifth (21 percent) said they researched rates, either by comparing online quotes or working with an independent insurance agent.

So how are most homeowners choosing their homeowners insurance provider instead? More than a third (36 percent) simply opened a policy with their auto insurer, while another 36 percent chose who was recommended to them by friends or family (15 percent), their mortgage lender (12%), or their realtor (9%).

While homeowners insurance can seem like a simple checkbox to mark when you buy your home, and then keep current once a year, policies can range widely in terms of perils covered, deductibles required, and maximum payouts allowed, as well as rates charged. Doing your homework to choose the best coverage, and for the best price, is a savvy homeowner move.

Why you should still consider local mortgage lenders

By Sabrina Karl

Anyone shopping for a home loan can see that online players have become a dominant force in the mortgage marketplace. Whether it’s big-name traditional banks or online-only lenders, the push to shop nationwide is as strong as ever.

But working with a local lender can still offer benefits, especially for certain types of homebuyers.

When you apply locally, you’ll be working directly with an individual loan officer, and most likely will meet with them face to face. This may seem simply quaint to some, but for others it can feel like a welcome friendly face during an otherwise intimidating process.

The feel-good aspect of personalized service is only part of the equation, though. For instance, self-employed homebuyers or those with multiple income streams may have difficulty gathering all their documentation, and a loan officer can assist in that process.

Mortgages by local lenders can also be approved more speedily, in some cases, since you are applying to an individual instead of a massive department that receives hundreds of applications a day.

A local loan officer may also be more flexible in approving your the loan. Whereas big lenders have rigid underwriting guidelines, a local lender may have more leeway. This is particularly true if it will keep the mortgage rather than sell it to Fannie Mae or Freddie Mac.

Local lenders often can even help if they foresee your application being rejected. They may be willing to work with you on steps that will strengthen your application so that your mortgage can be approved in the near future.

Rates and fees will of course be an important consideration. But for homebuyers who may want or need a more personal touch, a speedier process, or greater approval flexibility, the lenders in your community are worth a look.