The Consumer Financial Protection Bureau (CFPB) is planning to make some changes aimed at widening the accessibility of mortgage loans by allowing lenders more freedom in determining a borrower’s ability to repay. Currently, one of the requirements for a qualified mortgage (QM), the loan type preferred by both lenders and consumers, is a debt-to-income ratio of no more than 43%. This criterion is designed to be an indicator of the borrower’s ability to repay. However, there are other methods of determining this that can broaden the range of QMs. The CFPB’s solution is to compare the loan’s annual percentage rate (APR) to the average prime offer rate (APOR). Because a borrower with a high DTI would likely also have a high APR compared to APOR, DTI considerations are still indirectly included, but there will also be people with a high DTI but low risk of default that are able to get a good APR to APOR ratio and therefore successfully get a QM loan.
You may have heard the term MID in the context of purchasing a home or filing taxes. But what does this term mean? MID stands for mortgage interest deduction, and is a type of reduction in taxable income available to homeowners with a mortgage on their first or second home, or secured by their first or second home. When filing taxes, you can either take the standard deduction or itemize your expenditures. It’s common to simply take the standard deduction because many people aren’t sure how to itemize and may not even benefit from doing so. However, MID is one reason homeowners with a mortgage may want to itemize, since it is one of the itemizable deductions. The amount that the MID reduces your taxable income varies from 10% to 37% based on your homeowner’s tax bracket. It’s still possible that you would be better suited taking the standard deduction, depending on your expenditures and tax bracket.
For more specifics regarding the MID, please see the full article at https://journal.firsttuesday.us/tax-benefits-of-ownership-the-mortgage-interest-deduction-2/73853/. You can also call or email us with any questions you may have.
As a result of home sales volume dropping by 30% in Quarter 2 of 2020 from 2019, loan origination has also dropped considerably. The effect was somewhat lessened by low interest rates, which resulted in more refinances. The commercial sector, however, didn’t have that luxury. The Mortgage Bankers Association (MBA) forecasts a 59% decrease from 2019 in total commercial loan amount, from $601 billion to $248 billion. The majority of this will be from the multi-family sector, which was at a record high of $364 billion in 2019 but is only expected to reach $213 billion this year.
Lenders are optimistic, though, as long as governments can continue to keep people housed. Vacancies aren’t great for lenders, as they reduce the prospects of landlords, and recently evicted people certainly won’t be looking to originate new home loans any time soon. The MBA expects 2021 to bring the number up to $390 billion for commercial loans. The catch is that commercial landlords aren’t protected by the recently extended foreclosure moratorium. If multi-family homeowners are hit with a foreclosure, all their tenants will be affected as well. Commercial property owners as well as lenders are looking for new methods of loan accommodations.
I’ve previously mentioned that COVID-19 and the current economic downturn have resulted in an increase in mortgage forbearance requests. But what about mortgage applications? Interestingly, even as fewer people are able to pay their mortgages, people are still applying for mortgages, looking to take advantage of the current low interest rates on mortgage loans. And getting rejected at a much higher rate.
Lenders will always want to ensure that people are able to pay back the money they borrow. Obviously if the borrower has a mortgage in forbearance, well, that borrower doesn’t stand a great chance of being able to pay back a new mortgage. But even beyond that, lenders have been tightening restrictions in the wake of lessened economic stability. They are requiring higher credit scores, larger down payments, and more savings. Someone who was largely unaffected by the economic downturn may think they have a good chance at getting their mortgage loan approved. Not necessarily, if they were basing their expectations on old lender restrictions. Lenders are going to need to find the right balance between encouraging borrowers — since that’s how they make their money — and avoiding risky lending practices.
Currently, people age 50 or older account for 63% of homeowners nationwide. Three quarters of them live in single-family homes and 76% own their own homes. Increases in both population and longevity mean that the percent of homeowners in their 70s, 80s, and 90s is increasing. Trends among those over 65 reveal some of the problems with these growing statistics.
A support structure unprepared for these rising numbers of seniors begets homeowners unprepared for retirement and housing costs, as they are unable to manage both healthcare costs and housing costs without a steady income. And more of them over 65 still have a mortgage after retirement, a statistic which nearly doubled from 1989 to 2016. A similar statistic holds for loan-to-value ratios, doubling to 51% for those age 50-64 and tripling to 39% for those 65 and over. The average home equity amount was $143,500. These values originate from what were at the time low interest rates and recently popularized home equity loans.
Social Security is going to be an important factor in enabling seniors to acquire safe, accessible, and affordable housing, since it is a main source of income for many of them. In 2016, 9.7 million of those over 65, nearly a third, were spending more than 30% of their income on housing costs, and 4.9 million were spending over half.
Right now, it’s a gig economy for somewhere around 20% to 30% of the US workforce. Rather than having routine hours and a stable income, these workers are operating on commission and setting their own hours. Such people may be working for a company like Uber or Airbnb, or may be self-employed. While commission-based work can sometimes rake in the numbers on a good deal, sometimes you can go months or even more than a year without any income. To compound the issue, mortgage lenders are often looking for stable income — getting $1 million one day and nothing the next 6 months doesn’t enable you to qualify for a mortgage.
Two of the biggest mortgage lenders, Fannie Mae and Freddie Mac, want to change that. Fannie recently conducted a survey of 3000 lending executives, 95% of whom said current guidelines don’t count much of an increasing number of applicants’ earnings. In order to improve “access to credit,” both companies are seeking to change their guidelines to better match the gig economy. The two biggest obstacles are maintaining high quality loans and low risk of default, and automation. Freddie thinks it has a solution to the latter. A possible solution to the former is to reanalyze whether changing jobs constitutes a disruption of income. It’s entirely possible that the applicant is doing the same thing they’ve been doing for years, albeit with three different companies.
There are three major ways student loans can have a drastic impact on ability to own a home. The first is debt-to-income ratio. Most mortgage officers want your expenditures to be less than 36% of your income, and expenditures include student loan payments. Though those with a college education tend to make more money, because student debt can reach such high numbers, about 20% of applicants with student loans can’t meet this requirement.
Another is credit score. Currently, about 8% of borrowers are denied mortgages due to their low credit scores, and about 40% of those with student loan debts are expected to default on their loans by 2023. Once the debt stops being paid, credit score plummets, and it becomes near impossible to qualify for a loan.
The last barrier is down payments. Even if student loan borrowers have enough income to make the payments on time, often they aren’t able to save much — if any — of their yearly income. They aren’t able to pay the lump sum required for a down payment.
The result: well over 50% of current graduates with student loans will not be able to purchase their own home for decades. This exacerbates the strain currently impacting rental availability, and further disrupts housing markets.
A cash-out refi is a type of mortgage refinancing in which one borrows more than the remaining balance on their current mortgage, with the difference as cash. With interest rates as high as they are right now, refinancing for a better rate — the most frequent incentive to refinance — isn’t going to happen. That means a greater percentage of refis are of the cash-out type.
It’s uncertain whether the number of cash-out refis is increasing; their percent share is going up mainly due to fewer rate refis. There are other reasons to see an increase in cash-out refis, though. One is that retirees, whose numbers are presently on the rise, are wanting to invest money in repairing or remodelling their homes, and are using the cash from a refi to do so. In addition, two other options for cash, home equity loans and lines of credit, are no longer tax-deductible to the extent they were previously.
If you’re considering a refi, give us a call. We don’t handle loans, but have over 25 years of experience with lenders in LAs South Bay, and can help you select from the best.