How Mortgage Rules are Changing from 2019 to 2021 – Some Facts Borrowers Should Know

The year 2019 was the ideal time for prospective homeowners to buy the homes they’d always wanted. The mortgage market saw several changes that created a favorable atmosphere for making investments. Not only families looking for starter homes, but other people wanting to upgrade to bigger properties found real estate well within their reach. But, the expiry of mortgage protection rules, which will come into effect by the beginning of 2021, could change all that.

Buying a Home in 2019 Was a Perfectly-Timed Move

With mortgage rates hitting an all-time low of 4% and below, more borrowers were able to get mortgages and invest in start-up homes. As for people who already had homes and were paying mortgages at high interest rates, they had the golden opportunity to refinance their homes and switch to lower-interest loans. Further, new policies for regulating mortgage loans made credit more accessible to buyers wanting to buy homes just as this feature on Paper City explains. The updated conforming loan limit raised the maximum amount borrowers could take to $484,350. This limit was an increase of $30,000 over the previous year’s ceiling of $453,100. Accordingly, any person wishing to invest in a home was able to borrow additional sums as long as other qualifications were met. And, that made housing more affordable.

Understanding the Conforming Loan Limit and its Positives As the folks at MoneyGeek explain, conforming loans are mortgages that have the backing of the apex agencies of the country, Fannie Mae and Freddie Mac. The conforming loan limit is the maximum loan amount that can carry guarantee. Any loans bigger than the loan limit are considered as “Jumbo Loans.” Borrowers wishing to take jumbo loans must pay larger down payments and take loans at possibly, higher rates of interest. Thanks to the higher conforming loan limits, buyers were able to qualify for more money to buy homes. In addition, prospective homeowners could choose better neighborhoods where real estate prices were higher. Or, even pick bigger homes.

2019 Regulations Relaxed Mortgage Qualifying Criteria 

As a rule, when qualifying for a mortgage, people must show that they have a steady income and reliable jobs. However, at least 30% of the employed category now work as freelance contractors or are self-employed. In consideration of the changing work environment, the new regulations of 2019 made it possible for this category to qualify for and get loans to buy homes. Additional flexibility in providing documentation made it possible for applicants to get approval for loans even if they had alternative sources of income other than a fixed salaried job. These alternatives included contributions from co-borrowers who are not living in the same house like, for instance, a parent or guardian.  

Availability of Loan Programs that Permit Paying Less Down Payment  

Traditionally, paying at least 20% of the value of the house as down payment and taking a loan for the balance 80% is always a smart option. Borrowers can keep their loan to income ratio low, and clearing debt is a lot easier. Further, paying 20% allows new homeowners to avoid taking out personal mortgage insurance (PMI). This coverage is typically intended to protect the lender in case the mortgage taker is unable to pay back the loan. The added amount is added to the monthly payments the borrower must make. Using an online mortgage calculator can give applicants a fair overview of what to expect.  

Several loan programs are now available to people who cannot pay the recommended 20% down payment. For instance, the Federal Housing Administrative (FHS) loans backed by the government that require borrowers to pay only 3.5% down payment or the USDA Rural loans that don’t require any down payment. Before you apply for a home loan, you need to check USDA property eligibility for more information. Although not all loan-seekers can qualify for mortgages and loan products, they can search around for specific programs that suit their affordability and other individual criteria and situations. 

GSE Patch/ Ability to Repay Rule/ Qualified Mortgage Standard Will Expire Soon 

In July 2019, the Consumer Financial Protection Bureau declared that the Government Sponsored Enterprise Patch (GSE Patch) will expire by January 10th, 2021. The rule is an important provision of the 2010 Dodd-Frank Act instituted in 2010. As this article on Fortune magazine explains, the act was a part of federal efforts to reform mortgage lending practices. These regulations were designed to protect borrowers from unfair terms and conditions offered by mortgage providers in the foregoing years that ultimately lead to the mortgage crash of 2008.  

How the Rules Reversal Will Affect Mortgages 

The GSE Patch rule made it possible for mortgage seekers to apply for and get loans even if they did not meet all the eligibility criteria. These seekers included applicants who have high debt, but qualify for credit according to the complex underwriting benchmarks set down by Freddie Mac and Fannie Mae. The Dodd-Frank Act confers liability protection on any mortgages taken by borrowers with a 43% ratio of debt payment to income, each month. As a result, loan providers were encouraged to award loans. Reversing the patch without any alternative regulations to replace this protection will no longer guarantee credit.  

Expected Outcomes of the GSE Patch Expiry 

The reversal of the GSE patch can result in several outcomes. For instance, borrowers may find that the eligible debt to income ratio is now higher like, for instance, 45% or 47%. Fewer mortgage providers may be willing to offer credit to prospective homeowners with less-than-ideal credit scores. The expiration of the rule may also impact the mortgage market severely, considering that 16% of mortgages carry the GSE patch protection. Experts also argue that small, low-income groups could end up taking loans offered by unscrupulous lenders even if they cannot afford them. 

New homeowners intending to invest in homes after the end of the year 2020 may want to explore mortgage terms and conditions carefully before making their decision. In the interim period, before the Dodd-Frank Act expires, the federal government could institute alternative regulations for the protection of borrowers.  

Adam Hansen

Adam is a part time journalist, entrepreneur, investor and father.