If you are planning to purchase a home in the MoCo area, there are some new rules in the lending game you’ll need to know about. In an attempt to avoid a repeat of 2008’s housing bust, the Consumer Financial Protection Bureau is tightening the reins on mortgage lending requirements. In light of the recovering housing market, many homebuyers were taking advantage of the historically low interest rates, but the rates are rising, making many people nervous about homebuyers getting in over their heads again with rates that make their mortgages unaffordable.
The new stipulations will require that borrowers take on no more than 43% of the their income, whereas many lenders were willing to use a higher debt-to-income ratio to get more buyers qualified for loans. The 43% cap will also include student loan debt, property taxes and many other common forms of debt. Ironically this new rule comes soon after the administration is encouraging less strenuous approval measures for those with weaker credit. Seems odd to say the least, but you, as a homebuyer will need to be prepared for the new regulations.
So what can you do to increase you chances of approval? My biggest recommendation to get a copy of your credit report, sit down and really take a hard look at the amount of debt you have. Compare this to your income by dividing your monthly debt payments by your monthly income to yield the percentage of debt to income.
Here’s an example:
Monthly car note: $350
Monthly credit card payment: $200
Student loan payment: $250
Total debt payments: $800
Monthly salary from job: $45,000/12 mo. = $3750
$800/3750 = .213 or 21.3%
With this information, you’re now able to calculate the monthly mortgage payment you’re able to qualify for under the new debt cap:
n = highest total debt
n/3750 = .43 or 43%
(3750) * (n/3750) = .43 * 3750
n = $1612.50
highest total debt - current debt = maximum mortgage allowed
$1612.50 - 800 = $812.50
Of course if your brain hurts too much doing the math, there are a plethora of debt-to-income calculators available online that will do most of the work for you. Another point to note is that only you truly know what is affordable for you. It may not be the wisest decision to borrow what brings you to the maximum 43% debt-to-income ratio. Play it smart, and borrow within your means, considering all financial factors. Personal responsibility, not government regulations is what will keep homeowners out of trouble.
You’ll probably need help making your way through this jungle of a real estate market, and you’ll need an expert on your side. That’s what I’m here for!
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