Several forces may combine to make 2014 a transition year for mortgages. New rules issued from the Consumer Finance Protection Bureau (CFPB) are tightening qualification requirements for mortgages and providing disincentives for financial institutions to make risky loans. The Federal Reserve is expected to decrease economic stimulus throughout the year, causing interest rates to rise by as much as one full point. Home prices are also generally rising, attracting sellers who had been waiting for the market to improve.
As a result, your mortgage shopping tactics may need adjustment in 2014. Consider these five tips:
- Seek The Best Deal – If you have good qualifications for a loan under the new rules, you have plenty of leverage. Increasing mortgage rates have squeezed refinancing markets for lenders, and the new rules are weeding out less-qualified home mortgage applicants. Thus, more lenders are competing for fewer qualified homebuyers.
Do not hesitate to seek multiple options for interest rates and other perks — even if interest rates rise, competition may blunt the effect. (But don't let this inflate your expectations — see advice below regarding the right size house).
- Avoid Excessive Debt and Poor Credit – If you don't qualify, excessive debt or poor credit (or both) are the likely reason why. The new CFPB rules put higher expectations on homebuyers to prove their ability to repay loans. Lenders can still make risky loans, but they lose lawsuit protection on loans that don't meet certain qualification guidelines. As a result, if you have a debt-to-income (DTI) ratio greater than 43% or a poor credit score, lenders have greater incentive to reject your application.
Scrutiny for unusual deposits has increased, so having friends and relatives float you cash for window dressing does not work. Assess your situation honestly, and if your DTI ratio and credit scores are poor, fix this before mortgage shopping.
- Seek The Right Size House For You – People are often tempted to buy more house than they can realistically afford. The new CFPB rules exist to prevent lenders from enabling buyers to overextend themselves, but they can't solve the problem alone.
For example, choosing an ARM just to be able to afford initial payments on a larger house, when you fully intend to stay in the house for the term of the loan, is probably not a wise decision. By taking advantage of the currently low interest rates to lock in a 30-year fixed rate, and scaling back your house purchase to meet these slightly higher short-term payments, you will spend less money in the long-term.
- Avoid Automatically Selecting VA/FHA Loans – Programs such as VA and FHA loans can offer lower down payments, but require mortgage insurance to mitigate loan risk if your down payment is less than 20%. These rates are rising and are likely to continue to do so. VA/FHA loans may be right for you if you qualify – and need a lower down payment -- but compare all costs against a conventional mortgage before signing.
- Seek Favorable Refinancing Rates – While interest rates are rising, they remain low in historical terms coming into 2014. That means there is still time to refinance with a fixed-rate loan to lower your interest rate and monthly payments. As interest rates keep rising, however, time is running out - so act quickly if this is your goal.
Overall, if you have kept your credit in good standing and debts under control, you can use the current mortgage environment to your advantage. If you haven't controlled your debt and credit situation, however, the window for obtaining a low-interest first mortgage or refi may already have closed.