New down payment rules could impact mortgage rates
If you’re looking to buy a house with a down payment of less than 20%, you might want to buy now, because federal bureaucrats are working on a new rule that would penalize lenders who make loans to folks like you.
And when lenders get penalized, you pay more -- in this case mortgage rates of somewhere between 0.80% and 1.85% more than you’d get in today’s market.
Current homeowners who want to refinance would pay more, too, if they have less than 25% to 30% equity in their home.
Six federal agencies are writing the rule as part of their interpretation of the Dodd-Frank legislation -- Congress’ attempt to clean up the housing mess.
The idea was that if you make lenders hold onto a small portion of their riskiest loans, they would stop giving loans to people who can’t pay them back.
Now all the agencies have to do is decide what’s a risky loan and what’s a safe loan, known as a "Qualified Residential Mortgage," or QRM in bureaucrat-speak.
The first draft of the rule says a safe home loan:
- Has a 20% down payment (or 25% home equity if you’re refinancing with no cash out or 30% to refinance with cash out).
- Can be paid with no more than 28% of your gross income each month (your home loan plus all your bills can take up 36% of your income).
- Can’t be interest-only (each month you have to pay back some of the money you borrowed).
- Can’t have prepayment penalties or balloon payments.
- Can’t, in the case of an ARM, increase more than 2% a year or 6% over the life of the loan.
And a safe borrower can’t:
- Be 30 days late on any debt.
- Have a 60-day late payment in the past two years.
- Have filed bankruptcy or done a short sale or foreclosure in the past three years.
Saving that down payment will take you a scant 16 years, says the Coalition for Sensible Housing, a group of 44 consumer advocacy groups, real estate industry trade associations and lenders fighting to overturn the proposed QRM rule.
Even the people who drafted this portion of the Dodd-Frank law think the QRM proposal is a bad idea.
But these lawmakers said there's a simple fix: private mortgage insurance.
When they wrote the bill, they said, they expected the regulators would recognize that having PMI, which borrowers buy to cover the lender’s losses on bad loans, makes a loan safe.
Apparently, that didn’t happen.
The regulators are taking comments about the QRM rule until Aug. 1, and there’s been some indication the Obama administration will make the rule more reasonable.
If that doesn’t happen, and you don’t have a 20% down payment ready to go, be prepared to spend a little more each month.
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