There are two major changes coming to the lending landscape that will make it easier for a significant number of borrowers to buy a home or refinance in the second half of 2017 and beyond.
While these changes won’t result in an opening of the mortgage loan floodgates like we saw in the loose and reckless mortgage environment of the mid-2000s, they are expected to make a marginal positive impact.
While mortgage interest rates are still great, these two additional incentives could potentially help millions of homeowners obtain favorable purchase or refinance loans, saving a fair share of money.
1. Your credit score may be going up if you have tax liens and civil judgments
Starting this year, Equifax, TransUnion, and Experian will change how they report and score tax liens and civil judgments. In fact, the nation’s three major credit bureaus will exclude those items from reporting – and therefore the potential for negative scoring – if the information being reported isn’t complete.
Reportedly, tax liens and civil judgments will be excluded from credit scoring factoring if the consumer’s name, address, and either date of birth or Social Security number aren’t present and accurate. A good number of liens and judgments do not include this vital consumer information, which leads to mistakes and errors in reporting.
While the dropping of incomplete liens and judgments from reporting may not seem like a sizable event that will help a significant number of mortgage borrowers, consider that of the 200 million American adults with a credit score, about 7 percent of them have at least one lien or civil judgment.
By removing them, Equifax, TransUnion, and Experian will remove their effect on that consumer’s credit score, ostensibly, raising their score. In fact, a study conducted by the credit rating firm Fair Isaac Corp. (FICO), revealed that those consumers could see an increase of around 20 points to their credit scores, just by having those liens and judgments expunged from their score.
“It’s a significant impact for still a very large number of people,” said Thomas Brown, senior vice president of financial services at LexisNexis.
“If you look at someone that has a tax lien or a civil judgment, they can be anywhere from two to more than five times more risky just because of the presence of that information,” he said. “That’s very, very significant.”
While the move will have an indirect effect of raising credit scores for a large number of consumers, the change in reporting protocols was made to clean up the possibility of erroneous reporting due to those liens and judgments. In fact, according to the Federal Trade Commission, approximately 20% of all consumers have at least one mistake on their credit. But any boost to scores is a win for consumers – especially those trying to get a mortgage loan.
2. Mortgage giants Fannie Mae and Freddie Mac are allowing borrowers to have higher levels of debt and still qualify for a home loan.
The next change is a big one for mortgage borrowers. The two preeminent mortgage entities in our nation, Fannie Mae and Freddie Mac, have announced that starting in 2017, they’ll change their allowable threshold for borrower debt compared to income.
As it stood, the mortgage giants set the guideline for DTI, or debt-to-income at 45%. That means borrowers could only fit all of their monthly debt obligations – including the new proposed mortgage payment – to fit within 45% of their total monthly pre-tax income.
However, Fannie and Freddie will now raise that debt ceiling to 50%, or a 5% increase in allowable monthly debt payments.
So if a borrower makes $5,000 per month pre-tax, the difference is just $250 ($2,250 vs. $2,500). That may seem like a small increase, but it can significantly help borrowers buy their first home, refinance, or purchase a home with a larger price tag.
Consider that the mortgage payment (for illustration purposes) for a $300,000 loan at 4% is $1,432 per month, while a $350,000 loan at that same 4% is $1,670 per month – a $238 bump in monthly payment (not even the extra $250 under the new DTI guidelines.)
But this change wasn’t made with helping people afford more house in mind, but to afford a house at all.
In fact, Fannie and Freddie raised their debt cap to 50% based on the higher levels of student loan debt that tens of millions of Millenials are experiencing. With student loan reaching more than $1.4 trillion spread out over 44 million borrowers (that’s $620 billion more than our total national credit card debt!), it was harder and harder for borrowers to fit into Fannie and Freddie’s debt equation.
Consider that the average college graduate in 2016 held $31,712 in student loan debt, up 6% over just one year earlier.
Due to that epidemic of student loan debt, Millenials and adults under 30 have largely been left out of the housing recovery, with the American Dream of owning a home out of reach. In fact, Millenials now have some of the lowest rates of home ownership and home buying in modern history for their age group.
Raising the allowable debt balance to 50% from 45% is a good step to help more Millenials and others with student loan debt buy a house, but it also helps many other borrowers by making DTI standards easier.
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Can you take advantage of these two major changes to the lending environment? Will you qualify for a great low-interest refinance that saves you money, or a purchase loan on that dream house – or your first house? Contact me to find out!