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January 2014

What Is A Pre-approval?

A key component to the home buying process is the pre-approval. What is this document and why is it needed?

Homebuyers should start the “process” well before putting a bid/offer on a home (unfortunately this is not always the case). A homebuyer should understand what they can afford, the overall mortgage process, and the available products in the marketplace. This is where a licensed loan officer comes in.

A licensed loan officer will meet with prospective homebuyers to review such elements as credit, income, job stability, assets, etc. They will also review available products & the overall mortgage process. Analyzing such components allows a borrower to understand what to expect and what they can afford. Homebuyers can now shop with “knowledge.”

Once the homebuyer wants to put an offer in on a property, the loan officer will issue a pre-approval, stating that they have reviewed credit, income, assets, job stability, etc. The loan officer is stating that the client has the ability to “purchase” the home. By no means is this a commitment to lend. This will be issued by the lender. Pre-approvals will usually last for 30 days.

If you are in the market, or will be in the near future, call JFC Funding, LLC so we can help you understand the market, overall process and your purchasing power.

ATR/QM is here. What does it mean to you?

Years preceding the mortgage crisis, too many mortgages were provided to consumers without regard to one’s ability to repay the actual loan. Loose underwriting, accompanied by bad business practices, lead to one of the nation’s most serious recessions since the Great depression.
ATR/QM guidelines were implemented Friday, January 10th 2014, shaping the mortgage market for the foreseeable future. These changes attempt to tackle the above issues that crippled our economy. What does this mean to the consumer?
Ability to repay (ATR) requires lenders to make a reasonable, good faith determination that clients have the ability to repay the loan being offered. Lenders can satisfy this requirement by considering the following:

1. Current or reasonably expected income or assets
2. Employment status
3. Monthly payment on this loan
4. Monthly payment on “simultaneous loans”
5. Monthly payment for “mortgage-related obligations”
6. Current debt obligations
7. Monthly DTI ratio, or residual income
8. Credit history

The market will also be shaped around qualified mortgages. Qualified mortgages cover all closed end consumer credit transactions secured by a residential dwelling (and all occupancy types). The rule provides a presumption that creditors that originate Qualified Mortgages (QMs) have complied with the ability to repay (ATR) requirements.

QM requirements generally focus on prohibiting risky features/ practices, such as negative amortization, interest-only periods, loan terms longer than 30 years and balloon payments. In addition, all types of QMs limit points and fees. For certain qualified mortgages, debt to income ratios may not exceed 43% of a borrower’s gross monthly income.

Points and fee restrictions will be driven by loan amount:

• 3% Cap on total loan amounts > $100k
• $60k-$99,999: $3k Cap
• $20k-$59,999: 5% of total loan amount
• $12.5k-$19,999: $1k Cap
• $12,499 & below: 8% of total loan amount

Strength of legal protection for qualified mortgages is based on whether or not a loan is higher-priced. This will be determined by a loans APR. If APR exceeds average prime offer rate by 1.5% for first liens or 3.5% for second liens, such loans will be considered higher priced. Higher priced loans will carry a rebuttable presumption, while non-higher priced loans will be blanketed by a safe harbor.

Banks will still be allowed to originate non-qualified mortgages, but one can expect these loans to carry less favorable terms. Banks are rolling out such products as we speak.

It remains to be seen how many borrowers these changes will impact. Some sources say it may impact 5% of mortgages. Time will tell. What we do know is that we will be operating in a “new” lending environment.