The Federal Housing Administration, for years the only viable mortgage source for many buyers and refinancers, is making several changes to its programs that will make it tougher for some to get a loan.
DEAR MR. MYERS: The mortgage broker that is handling our refinancing with an FHA loan is pushing us to close the deal by the end of this year, claiming that the agency is about to institute tougher requirements for borrowers. Is this true, or is he simply anxious to collect his loan commission?
ANSWER: The Federal Housing Administration is indeed tightening its mortgage-eligibility requirements for borrowers. A key change, which will take effect Jan. 10, involves a borrower’s so-called debt-to-income ratio.
There actually are two kinds of debt-to-income ratios, often referred to as DTIs, and they’re both scrutinized by lenders when reviewing a consumer’s mortgage application. The first, called the front-end ratio, measures the percentage of the borrower’s income necessary to cover the proposed mortgage payments and related housing expenses, such as property taxes and insurance premiums. The second, called the back-end ratio, measures what percentage of income would be needed to pay those housing expenses and all other recurring debt, including credit-card accounts, car payments and student loans.
Under current rules, applicants with good credit scores can have a back-end ratio as high as 55 percent and still qualify for a mortgage. But in a few weeks, that maximum will be slashed to 43 percent — a change that will have a disproportionately negative impact on those seeking relatively large loans, have fairly modest incomes or a lot of pre-existing debt.
The FHA also is reducing the size of the loans that will insure in about 650 counties across the U.S. The maximum loan amount in the nation’s highest-priced markets — including many parts of the Northeast and in California — will drop to $625,500 from $729,950.
The new rules will compound problems caused by changes that the FHA made a few months ago. Those included a new requirement that a lender raise the ratio for any applicant with at least $2,000 in collections accounts (medical bills are excepted), because paying those debts could hurt the borrower’s ability to make the mortgage payments.
Such accounts don’t necessarily have to be paid off to qualify for an FHA loan, but any existing court-ordered judgments do.
If any of these changes would impact your chances of gaining mortgage approval, follow your broker’s advice and try to close the transaction by the end of this year. As a bonus, you’d bolster your housing-related deductions on the 2013 income-tax return that you must file by April, rather than having to wait an extra year to claim them.
DEAR MR. MYERS: Is it true that Fannie Mae and Freddie Mac have stopped evicting homeowners who are in foreclosure?
ANSWER: Yes, but only temporarily. The two mortgage giants, which together own about half of all home loans in the United States, both agreed to halt evictions between Dec. 18 and Jan. 3 so homeowners who are in default could spend one last holiday season in their property.
DEAR MR. MYERS: I already own my own home, but now I would like to begin investing in rental properties because prices have been picking up and the economy seems to be getting better. I don’t have a lot of cash, so I was thinking about buying a small piece of land. Is raw land a good investment?
ANSWER: Usually not. For starters, raw land doesn’t generate any rental income to help offset a buyer’s mortgage payments and property-tax bills. Your letter states that you “don’t have a lot of cash,” so you can imagine the pickle that you would find yourself in if the monthly bills start piling up but you didn’t have the money to pay them.
In addition, raw land cannot be depreciated — an important tax benefit that only investors can use if their property provides at least a modicum amount of rental income.
Buying raw land is also a risky proposition because the resale market for such properties is typically thin: You won’t make much money, but could lose a lot of it if sellers outnumber buyers when you eventually put the property back up for sale.
You probably should postpone your real-estate investment plans until you have saved enough to make a down-payment on a rental house, duplex or small apartment building that will create some monthly cash rather than buying an undeveloped parcel that likely will leave your wallet or bank account barer than the raw land that you want to purchase.
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