Mortgages in 2014: How New Requirements Will Affect Homebuyers

SUMMARY: Starting this year, mortgages are newly impacted by now-codified Consumer Financial Protection Bureau guidelines. And so, for first-time buyers seeking a mortgage, or those just returning to the housing market since its late-2000s collapse, we look at how the borrowing landscape has changed.

Even if you've bought a home before, wading back into the market, in 2014, is bound to be a different enterprise from what homebuyers experienced before the recession. Recently implemented changes to mortgage guidelines in the U.S. mean that the qualifications and documentation required to secure homebuyers' loans are stricter and more comprehensive than in the past.

Knowing the expectations that virtually every lender will now bring to the borrowing process is to every buyer's benefit. Let's look at the new mortgage landscape, outlining key considerations when it comes to the rules, and what you'll need to bring with you when approaching the lender's table.

The Shortlist: Loan Changes for Homebuyers

In January, the Consumer Financial Protection Bureau's Qualified Mortgage guidelines went into effect, and so the circumstances surrounding loan qualifications have become more rigidly structured.

Generally speaking, the new guidelines are in place to help protect homebuyers from the kind of loans that contributed to the housing market's collapse, circa 2007 and 2008. Along with that kind of protection, however, can come a narrowing of the passage between mortgage applicants and closing the deal.

Major factors that come into play can be broken down as follows.

• Debt-to-Income Ratio: Adding together all the debt for which you make your monthly payments, the QM guidelines now specify that your debt-to-income ratio cannot exceed 43%. In other words, if you make $150,000 per year, you can't carry balances owed of more than $64,500. There can be some exceptions to the rule, especially for the self-employed, for whom lenders can sometimes consider other financial factors. Also, some loans, such as those issued along Veterans Administration channels, can allow for a DTI that is greater than 43%.
• Loan Limits: The QM mandates that mortgages shall not be set for terms longer than 30 years. And the points and fees borrowers pay on their mortgages? These can no longer exceed 3%.
• Interest-Only Loans: One of the features that came with some pre-collapse loans  risky ones, at that  was an interest-only period, during which borrowers would make monthly payments that did not reduce the principal, they only serviced accruing monthly additions. As of 2014, the CFPB rules do away with such options.
• Negative Amortization and Balloon Payments: Lenders can't issue a loan in which the principal increases, month to month, and  minus limited exceptions for certain rural and "underserved" regions  they aren't allowed to create a mortgage in which a large final payment is due at the end of the loan's term.

The QM guidelines work in these ways to make it more certain that borrowers will be able to afford their loans, and not slip into a situation where they're upside down, as many did during the now receding crisis. In that sense, the new rules aren't so much a codification of things that banks did before  because, as we saw, some did not enforce these kinds of stopgaps  but a true increase in restrictions on how mortgages can be issued.

There are some gray areas, however, especially surrounding mortgages sold to Fannie Mae or Freddie Mac  as well as those insured by HUD, the VA, and similar agencies. The upshot: pending possible future changes, these are considered to qualify under the QM guidelines even if their details (such as the DTI limit) do not entirely conform to those in the preceding list.

Documentation: What Borrowers Need in 2014

What many borrowers will also find to be new about their mortgage experience, under the 2014 QM guidelines, is the thoroughness with which banks and lenders must now treat the documentation process. In other words, the era of low- and no-doc mortgages is over.

Lenders will seek details along eight main lines, when it comes to loan applicants: (1) current or reasonably expected income/assets; (2) current employment status; (3) amount of the monthly payment on the loan in question; (4) any monthly payments on simultaneous loans; (5) monthly totals owed on other mortgage obligations; (6) current debt of other kinds; (7) the borrower's DTI; and (8) the borrower's credit history.

With those parameters in mind, you'll want to bring at least the following to the table, when it comes to documents, in pursuit of a mortgage, in 2014.

• Forms that verify your employment
• Pay stubs
• Statements representing income from any assets
• Tax returns
• Bank statements
• Statements representing monthly bills to other loans and debts
• Any legal documents that outline alimony and/or child support agreements
• Copies of passports

Again, the changes represent a broadening of requirements that typically did not used to be applied to the kind of loans that homes other than the most expensive required. It's a shift, and while the list might seem intuitive, given the eight points of the new guidelines for documentation, loan experts still see applicants arrive without them all too often, since the January change.

"I routinely have to have conversations with customers who purchased pre-housing crisis who don't understand why they are now being asked to provide documents that theydid not have to provide when they first purchased a home," said Hillary Legrain, Esq., a mortgage loan officer at First Savings Mortgage, in an e-mail interview. "The days of not needing to provide much documentation to get a loan are over."

Catching up on the changes now can save you heartache later. And then, you can move forward knowing that rules are in place to proscribe the problematic products that led too many homeowners into hard-to-save situations throughout the middle of the last decade. You're in better hands, even if your mortgage process just got a bit more complex.