February presented us with major changes to mortgage
lending rules. These new guidelines aim to curb some of the excesses that
occurred during the sub-prime years—hopefully resulting in a lower risk of
default and foreclosure by borrowers and a healthier real estate climate for
everyone.
QM: “Qualified Mortgage”
This all came about as one offshoot of the Dodd-Frank
legislation that went into effect in 2014. It creates a new category,
“Qualified Mortgage.” Lending institutions are required to document each loan
they deem to be a QM; when they do, they benefit by being able to sell them to
Freddie Mae and Fannie Mac, and are protected from legal action in the event of
a future default.
The reason that these changes won’t keep most borrower
from getting a Charleston loan is that loans that don’t qualify (“Non-QM” loans)
will still be offered by some banks—they’ll simply keep them on their own
books.
Ability-to-Repay
Rule
The bedrock requirement for a QM is an evaluation of the
borrower’s debt-to-income ratio. That’s the projection of debts divided by
income on a month-to-month basis — especially important when getting a Charleston
loan with a variable interest rate. If it seems to you that this calculation makes
common sense for any loan—I’m in your camp! The reason a bank might choose to
issue a loan that does not meet the letter of this requirement could be their analysis
that the percentages dictated by the rules are too strict for a particular borrower.
Risky Business
A Qualified Mortgage can’t have any of the risky factors
that were hallmarks of the mortgage meltdown. Included are “no” or “low-doc”
loans; loans with terms longer than 30 years, interest-only loans, and those
with minimum payments that don’t keep pace with interest rates, causing the
loan balance to increase.
So: what’s the bottom line for buyers intent on gettinga loan in Charleston, SC this year?
The good news: most loans will go through as before (estimates are about
95% of them). But more paperwork and longer processing times
are likely, and since fees and charges for a QM cannot exceed 3% of the
mortgage, getting a smaller loan might become more difficult if banks determine
they can’t make a profit.
In any case, coming prepared is still the best insurance
that your loan goes through as smoothly as possible. If you’re looking to buy ahome in Charleston, SC this season, I’ll help make sure your preparation is
first-rate!
Interested in selling your
Charleston area home? Visit: www.jeffcookrealestate.com
Interested in buying a Charleston
area home? Visit: www.discovercharlestonareahomes.com
-Jeff Cook
Jeff Cook
Real Estate
Charleston,
SC
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