Getting Mortgage Will Be Even Tougher
The Federal Reserve has just proposed guidelines for a QRM, “Qualified Residential Mortgage.”
According to a mortgage broker I spoke with, in order to get a QRM for the best (lowest) interest rate, a borrower would need at least a 20% down payment. In addition, the maximum monthly payment for PITI (Principal, Interest, Taxes and Insurance) will be 28 per cent of income. This is called the “front end” ratio. The back end ratio (PITI plus other monthly expenses) must not exceed 36%.
Those who do not fit into this equation might still be able to get a loan, but at a higher interest rate. I was also informed that, for mortgages that do not meet the QRM standard, lenders will need to maintain at least a five per cent ownership of the loan. This is to insure they have some “skin in the game.”
The good news is that these stringent requirements will significantly reduce the likelihood of future defaults. The bad news is that current lending guidelines are already quite restrictive and new ones will make it more difficult and expensive for people to get purchase and refinance loans.
When interest rates rise, as they surely will, the combination of tighter standards to get a loan and higher monthly payments is likely to have a dampening effect on the already soft housing market.
There is a period for public comment and current ideas might change. Regardless, those without a suitcase full of cash and perfect credit will probably be paying much more for mortgages very shortly.
For more, read “Fed Unveils Proposal on Mortgage Standards.”