The new mortgage rules that are likely to affect your next home purchase

Washington Post
(12/13/2013 9:30 AM, Michele Lerner)

If you’re planning to buy a house next year — and unless you’re in a position to make an all-cash offer — chances are you’ll be affected by some significant changes occurring in the mortgage application process beginning in January.

Several federal agencies are implementing new policies aimed at addressing lax underwriting standards that led to the housing market crash more than five years ago. The new policies could play a role in how much house you can afford.

The policies require lenders to better verify that borrowers can afford the houses they are seeking to buy and can repay the loans. Some are intended to protect borrowers while holding lenders more accountable for their business practices.

For instance, one set of rules requires mortgage servicers to provide consumers regularly with accurate information about their loan balances and fix mistakes quickly. The rules also prohibit servicers from starting the foreclosure process until 120 days after the borrower’s last payment.

“By bringing back these basic building blocks of responsible lending and servicing the customer, we will improve conditions for consumers seeking to enter the market and for all those who are still struggling to pay down their existing loans,” Richard Cordray, director of the Consumer Financial Protection Bureau, said in prepared remarks made last week to the Consumer Federation of America.

“By making the mortgage market work better, we will build consumer confidence and strengthen this essential foundation of our economy,” he added.

Another big change affecting the Washington region is a Federal Housing Administration (FHA) plan to decrease the maximum loan amount for borrowers in this area beginning Jan. 1.

The agency announced this week that its mortgages will be limited to a maximum of $625,500, down from $729,750. Metropolitan Washington has high-priced housing — about one in four homes in the region sells for $600,000 and above, according to RealEstate Business Intelligence, a subsidiary of Rockville-based multiple listing service MRIS. The FHA’s new loan limit next year will match the caps for conventional loans purchased by Fannie Mae and Freddie Mac.

The FHA said in a statement that the agency wants to reduce the government’s role in mortgage lending to borrowers who are “underserved” — who either are low-income or have difficulty obtaining loans. The higher limits were put in as an emergency measure in 2008 and were supposed to last one year but were allowed to continue because of the lack of private loans.

Borrowers who need a loan of more than $625,500 will have to get a jumbo loan, which typically requires a down payment of at least 20 percent. FHA loans are not only a little more flexible in terms of their qualification guidelines, but, more important for many people, they require a down payment of just 3.5 percent.

“Switching on the fly from a down payment of 3.5 percent to 20 percent or more of the purchase price is not really an option for most people,” says Patrick Cunningham, vice president of Home Savings and Trust Mortgage in Fairfax.

“It could be a $100,000 difference in money needed,” Cunningham adds. “Not something most people just pull out of the couch cushions.”