Over the past several years, we have seen significant changes to the way that lenders qualify borrowers applying for mortgages – with each change making the mortgage qualification process progressively more challenging.
The latest proposed change for January 1st, 2015 would see existing unsecured debt payments (credit cards, lines of credit, etc) calculated using 3% repayment on the balance regardless of the contractual amount you’re required to pay each month. Those debts and their corresponding 3% payments ultimately determine your mortgage qualification amount. The more outstanding debt you have, the smaller mortgage amount for which you will qualify.
Currently, lenders accept the contractual payments for unsecured debt, even if the monthly payments are lower than 3% of the outstanding balances.
- Outstanding debt includes a $20,000 line of credit.
- At an interest rate of 6%, the bank currently only requires a minimum monthly ‘interest only’ payment of $100.
- New rules would require the more conservative use of 3% of the debt balance during qualification.
- This means that, after January 1st, the lender’s underwriting practices would require a payment of $600 per month (3% of the $20,000 outstanding debt) be used for qualification purposes instead of the current $100/month interest only payment.
- This has a significant impact on qualifying ratios.
- For instance, if someone makes $70,000 a year and wants to buy a home, and they have one debt – the $20,000 line of credit – they would currently qualify for a mortgage of about $425,000. As of January 1st, their qualification amount would drop to about $350,000 – a significant erosion of $75,000 in the buyer’s home purchasing capacity.
If you have balances on a line of credit, car loan/lease, credit card, student loan, etc, the mortgage qualification amount will dip even more as of January 1st!
Given that interest rates continue to hover near historic lows, the full impact of these new qualification rules could be even more pronounced and magnified once rates start to climb. If you’re considering a new mortgage in the next 4-6 months, please contact me so we can discuss your specific situation and plan accordingly in advance.