The times they are a-changin’
As most property investors already know, credit has been much tighter over the last several years due to the financial meltdown and recession between 2008 and 2011. High foreclosures due to lax credit regulations by lenders helped to fuel the housing crisis. And new credit-tightening rules were put into effect over the last several years to help ensure only the most-qualified of borrowers would be able to qualify for mortgages. Gone were the old tried and true “no doc” (no documentation) loans or “interest only” loans that got so many homeowners (and property investors too) into deep trouble. This became especially evident as adjustable rate mortgages adjusted upwards, and borrowers were stuck between an inability to pay the higher monthly costs, along with declining property values in their houses.
Get prepared for more crunch time
Well, you ain’t seen nothin’ yet…Investors need to be aware of new mortgage credit application rules that will go into effect as of January 10th, 2014. These rules were created by the Consumer Financial Protection Bureau, and were specifically designed to continue the trend of making the mortgage marketplace safer – not only for consumers who take out mortgage loans (in effect, protecting them from their greedy selves), as well as to protect investors who invest in mortgages as securities.
The key elements of the new rules will be focused on a borrower’s ability to pay back their loan. To ensure the highest safety standards, banks will now be analyzing all of these features about you: your employment history, current employment, your total income as well as assets, the monthly payment required on the loan amount you are applying for, your monthly payment on all your other house-related mortgage costs (such as insurance and property taxes), your costs for child support and/or alimony, your entire credit history, and finally, your monthly debt ratio (the ratio between your income and all real and projected monthly debt retirement costs – and this ratio will need to be under 43% of your gross monthly income).
The new borrowing…
These new borrowing rules will apply to Fannie Mae and Freddie Mac loans, which traditionally account for almost 70% of all new mortgages according to the Federal Housing Finance Agency. However, banks have the option to hold onto their own mortgages if they choose, and some may decide to retain these lending requirements anyway, for their own safety. So it’s best to plan on acceding to the rules regardless as you plan your investment purchases for the coming year.
Naturally, these new rules favor those with a steady job, excellent credit score (above 750 for the best interest rates), as well as the greatest down payments (certainly, above 20%). Though, as most investors know, lenders traditionally require at least 30% down on most strictly non-owner-occupied investment properties. Low-income and the self-employed will find the hardest road ahead as they try to ford the onslaught of these new lending requirement rules.
One strategy you can employ right now is to attempt to act quickly on any year-end purchases, so you can qualify under existing (though still stringent) lending requirements. Also, make sure you try to get your total debt load under that 43% ratio mentioned above. And close on your investment property by the end of the year. Another strategy is to plan ahead for the new requirements, and begin to pay down your overall debt.
If you have multiple investment properties, and some properties are underperforming, and not throwing off enough cash flow or are negatively geared (throwing off negative cash flow), consider selling them of in the coming months. In this way you can lower your overall debt. And if you’re self-employed, make sure your record-keeping is impeccable, and crunch the numbers ahead of time. Most lenders will still require two years of tax returns for the self-employed, then average them to come up with a gross income amount. However, if one year of the last two was substantially better than the other – the lender will most often use a weighted average, and the weight will be more heavily on the worse-performing year’s income. Again – it’s best to be prepared ahead of the new credit crunch rules.
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