CNBC’s Diana Olick reports that two major lending changes mean it may be easier to qualify for a mortgage.
Credit Rating Changes
First, the three major credit rating agencies will no longer report tax liens and civil judgments on some consumer’s profiles if the information isn’t complete. For the data to be reported, it must include the person’s name, address, and either their date of birth or social security number. With the negative marks being removed, it could raise a person’s credit score as much as 20 points. In the past, the presence of a tax lien and/or judgments made a person five times more risky. The credit reports do sometimes contain errors and approximately twenty percent of people have at least one mistake on one of their three credit reports.
Debt Restrictions for Loans Reduced
Second, Fannie Mae and Freddie Mac are allowing borrowers to have more debt and still qualify for a loan. The debt-to-income ratio limit will be 50% of pretax income instead of 45%. The reason for the change is to accommodate those with student loan debt. After the financial crisis, the underwriting rules tightened resulting in lower default rates even below historically norms. Due to high levels of student debt, younger borrowers are being left out of the housing recovery.
Overall, the risk to the marketplace will rise and with Fannie Mae and Freddie Mac still under government conservatorship, losses will be the responsibility of taxpayers. Ultimately, the new amount of risk being undertaken would be for the CFPB or Congress to critique. The market of mortgage borrowers appears to be shrinking as interest rates inch up causing fewer refinances and the price of homes has increased resulting in fewer homebuyers. These changes are meant to enlarge the mortgage market a little.
The bottom line is before you seek to get a mortgage, make sure you can afford it. Just because you qualify for a loan does not mean you need to borrow the maximum amount allowed. It is always wise to make a budget and stick to it. And remember, just because a lien or judgment does not show up on a credit report does not mean it disappears. If you have financial questions, contact one of our offices for a free, no obligation consultation.
Heather Ellis Banks is an Associate Attorney at the Bond & Botes Law Offices in Knoxville, Tennessee. She holds a Bachelor of Science from the University of Tennessee Knoxville, and a Juris Doctorate from the University of Memphis, Cecil.C. Humphreys School of Law. She has been helping consumers to navigate through the bankruptcy process since 2005. Read her full bio here.