Mortgage Requirements are Easing
From the earliest days of home mortgage loans, the borrower’s finances are primarily what determines if a mortgage would be granted; and if it can, what the interest rate would be. The key issue banks analyze is whether your income can sustain the monthly mortgage payment and your monthly recurring bills (utilities, cable TV, etc.) In short, the mathematical model the banks use is whether your monthly recurring bills divided by your total monthly income stay below the specific debt to income ratio (DTI).
After the 2008 Financial Crisis, the Consumer Financial Protection Bureau (CFPB) instituted stricter mortgage requirements on banks to issue a Qualified Mortgage (QM). While this move by the CFBP helped to stabilize the economy, it also had the obvious effect of denying mortgages to millions of people who didn’t meet the new QM standard. The maximum DTI was set at 43%.
Then, on December 10, 2020, the CFBP removed the 43% cap, making it easier for many more people to obtain mortgages. The new rules are more lenient in that the banks must consider factors other than the DTI ratio. In addition to the DTI ratio, the banks must consider residual income or assets other than the value of the home or debts. Additionally, banks can use underwriting rules from Fannie and Freddie Mac, the Fair housing Administration (FHA) and the Veterans Administration (VA). Fannie and Freddie, the FHA, and VA loans generally have easier mortgage requirements.
Also, under the new rules, a mortgage qualifies as a QM if it is a first lien with a percentage rate that does not exceed the prime rate (the interest rate that banks charge their most creditworthy customers – generally large corporations) by 150 basis points. Also, the borrower must not have more than two late mortgage payments during the first 36 months.
The old rules made it more difficult for recent immigrants who may not have established credit yet, and lower income people who didn’t meet the strict DTI requirements. The new rules should help these sectors of the population.
According to the Brookings Institution (a highly respected think tank), the Federal Reserve (The FED) has cut the rate banks pay to borrow from each other by a total of 1.3 percent since March of 2020, reducing it to a range of 0 to 0.25%. When banks pay less to borrow, it keeps more funds in their coffers, which in turn allow banks to issue more loans.
The FED has also resumed purchasing massive amounts of securities, an important tool it employed during the 2008 Financial Crisis. Since the Covid-19 pandemic, treasury and mortgage-backed securities markets have become severely hampered. According to Brookings, “ … the FEDS actions aim to restore smooth market functioning so that credit can continue to flow … Between March 2020 and early December the FEDS portfolio of securities held outright grew from $3.9 trillion to $6.6 trillion.”
These steps are designed to mitigate the affect of the virus on the economy. “The Fed is trying to ensure that credit continues to flow to households and businesses during this difficult time … It also wants to do what it can to limit the permanent damage to the economy, so that when the pandemic recedes, the economy can grow again …”