What New Mortgage Lending Rules Mean to Home Buyers

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Fannie, Freddie rules & fees make it harder to overdo mortgage debt

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Unfortunately for buyers, these new rules also raise the fees on most mortgages.

The federal first-time home buyer tax credit, which expires Dec. 1, makes taking on mortgage debt more appealing for some buyers, especially combined with lower home prices and lower interest rates, but Ethan Ewing, president of Bills.com, cautions buyers to be aware of new changes to mortgage borrowing.

The U.S. mortgage industry largely follows rules established by Fannie Mae and Freddie Mac – two very large government-sponsored enterprises that purchase mortgages from the lenders that originate home loans. Fannie Mae and Freddie Mac back nearly half of all U.S. home loans.

"As most home buyers may know, the two agencies suffered huge losses in the mortgage meltdown. To save them, the U.S. government bailed them out last September. Afterward, Fannie Mae and Freddie Mac imposed new restrictions on loans they would purchase after April 1 in order to make mortgage lending more secure," Ewing explained. "Unfortunately for buyers, these new rules also raise the fees on most mortgages."

Here is a look at the changes:

1. Appraisals lower -- and costlier -- Many would-be home buyers are receiving lower-than-anticipated appraisals on desired properties. Some appraisals are significantly lower, to the point that purchases are put in peril. "Appraisers now are under significant scrutiny and are acting very conservatively when it comes to valuing homes," Ewing said. Additionally, appraisers will count only comparative property figures from the last three months. Because home sales have slowed, appropriate comps may be few and far between. Plus, Fannie Mae and Freddie Mac are requiring appraisers to complete additional research and reporting on all appraisals. Many appraisers are charging more for this extra work.

What to do: Allow plenty of time for a home deal to go through, so that you can seek a reappraisal or restructure the loan if needed. Talk frankly with the mortgage lender about what to do if the appraisal is too low. Be prepared to pay for appraisals up front, and to pay more than in the past.

2. Longer processing times – As mortgage lenders and banks have shed jobs over the last two years, staffing is an issue for all mortgage departments. Combined with record-low interest rates, the situation is resulting in loans taking twice as long – or longer – to get through processing and on to closing.

What to do: Complete and submit all paperwork to your broker, lender or bank as early in the process as possible. Once they have received all documents and ordered the appraisal, the loan can be submitted for underwriting. Only then does it make sense lock in the interest rate on the loan. Keep in mind that 30-day loan locks will provide the best rates. With each incremental 15-day lock period, the rate will worsen.

3. New risk-based pricing – This spring, Fannie Mae and Freddie Mac introduced new risk-based pricing models that charge additional fees to borrowers with lower credit scores. Called Loan Level Price Adjustments, the fees affect just about every borrower with a credit score lower than 740.

What to do: "This trend demonstrates yet again why it is important to maintain the best credit score possible. Before going to a mortgage lender, do your best to improve your credit score by paying bills on time, paying down debt and then keeping debt levels low," Ewing advised.

4. Points come into play -- Points are a percentage of the loan amount paid upfront to obtain a lower interest rate on the loan. The more points paid, the lower the rate, and vice versa. Buyers who are planning to stay in their homes for more than three or four years may very well benefit from paying discount points to obtain a lower interest rate. Buyers should ask their broker, lender or bank for different rate options with varying levels of points. At least one of these should be a no-point option so that the buyer can see the "true" rate.

What to do: One point equals 1 percent of the loan amount. Whether buying points is worthwhile depends in part on how long the home buyer plans to stay in the home. The longer a buyer lives in the new home, the more likely it is that buying points will make economic sense. Those who do pay points should bear in mind that they are usually tax-deductible on a federal income tax return.

5. Higher mortgage processing fees -- For every type of mortgage, borrowers are paying higher fees for underwriting, loan processing, appraisals, and sometimes even to lock in a certain interest rate. In the past few years, with "no-doc" loans and less stringent standards, underwriting was less complex. Today, mortgage loans are closely scrutinized, and borrowers are paying for that scrutiny.

What to do: Anticipate that mortgage fees will total as much as 3 percent of the loan amount, although this depends on the loan size. The smaller the loan, the more likely it is that the percentage you pay in fees will be higher.

6. Condos face tight restrictions -- Condominium buyers face even tighter rules. Fees are higher, and mortgages may be rejected altogether if the borrower's down payment or credit score is not high enough, or if too many condo owners in the complex are delinquent on their association fees. For new buildings, the agencies will not back mortgages unless 70 percent of units have been sold. Buyers face higher loan fees if they do not put down at least 25 percent of the purchase price, and some buyers report not being able to attain financing at all.

What to do: Plan to accumulate a significant down payment before buying, and be sure to obtain pre-approval for a mortgage before identifying a property.

"The good news for the economy is that these rules are a reaction to a mortgage-lending industry that had spiraled out of control," Ewing said. "For individual buyers, the new regulations can be a headache. But for those who are well prepared to purchase, these rules will not prevent you from buying a piece of the American dream."

About Bills.com
Based in San Mateo, Calif., Bills.com is a free one-stop portal where consumers can educate themselves about complex personal finance issues and comparison shop for products and services including credit cards, debt consolidation, insurance, mortgages and other loans. Bills.com holds the No. 257 spot on the Inc. 500 list for 2008, and the No. 3 spot on Entrepreneur Magazine's Hot 100 list of the fastest-growing U.S. companies.

Bills.com and its sister companies, Freedom Debt Relief and Freedom Tax Relief, are wholly owned subsidiaries of Freedom Financial Network, LLC. The company has served more than 50,000 customers nationwide since 2002 while managing more than $1 billion in consumer debt. Its RSS feed is available here.

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