The challenges consumers have faced in recent years in procuring a mortgage may be coming to an end. Here are four major changes that could make it easier for you to get a mortgage.
1. Your landlord experience for investment properties
Until recently, in order to qualify for conventional loan financing for an investment property, you needed to show a history of being a landlord for the most recent past 24 months. The reason this guideline was in place was to ensure that your experience as a landlord would support your ability to hold a rental property and any associated debt with it. Now, you no longer need a 24-month history when using rental income to help qualify for an investment property.
2. Converting a primary home to a rental
One of the opportunistic actions stemming from the financial collapse was buying and bailing. A borrower with good income, credit, and debt would buy a new primary home, say they were going to rent out their current home that was underwater, close escrow on the new home, and then let the underwater home go into payment default. This caused major banking losses, and as a result a guideline was created to curb this activity -- requiring borrowers to have a 30% equity stake in the home they were converting to a rental when using rental income to qualify for the acquisition of a new home. The banks' reasoning behind that was someone would be less likely to walk away from a home containing significant home equity.
New guidelines have turned that around, and now you could even be upside down on your primary home, legitimately rent out that home no matter what your equity, with a bona fide rental agreement and paper trailing of the security deposit, and get the benefit of 75% of those gross rents to use as income toward qualifying. This is a favorable option if the borrower's intent is to keep both homes, as opposed to a contingent sale, or risk not qualifying.
3. Employee expenses no longer count against your income
If you wrote off expenses against your income as an employee (using IRS Form 2106/Unreimbursed Expenses), this used to reduce your income used for loan qualifying. This was always a red flag for a mortgage company, because you're technically not paying taxes on the full amount of your income. This guideline typically used to affect people in the trades the most, where they would incur dues, subscriptions, uniforms, office equipment, etc., that they paid for out of their pocket. This is no longer the case. You can have as much employee business expense write-offs as you would like, and the lender will still use your full W-2 income, without limitation. This change now allows you to qualify for more loan than you could have in years past.
4. How you pay off debt
This one affects many mortgage loan applications, and here's why. Let's say in order to qualify for a certain house price, your debt load is too high. But you have the extra cash and you can't decide whether to put more money down on the home or pay off the debt to adjust your income and other expenses so they align with your target mortgage payment. Before, if you had to pay off the debt in order to lower your debt-to-income ratio, you actually had to close out the credit account as well (and closing a credit card can have a negative impact on your credit score by lowering your available credit). That's right, even if you have a credit card with as little as a few hundred dollars on it, and you were paying it off to qualify, it had to be paid off in full and closed out by close of escrow. You can now pay off the debt to qualify without closing the credit account.
Fannie Mae and Freddie Mac's new guidelines can make it easier for borrowers to qualify, which may be good news for them as we move into a more exuberant housing market. As always, it's important to be aware of what you can reasonably afford as you work your way toward homeownership, and know what steps you can take to help keep your costs lower. One factor that can help is having strong credit -- better credit can get you access to lower interest rates, which can lower your costs over the life of the loan. You can get an idea of where you stand by seeing your credit scores for free on Credit.com.
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