If you’re in the market for a mortgage or looking to refinance your home, you’re probably already tracking the mortgage industry and the rising interest rates we’re seeing in the housing market. Over the last year, mortgage interest rates have climbed more than a percentage point. While increasing interest rates could signal an improving economy and a rebounding housing market, it also means a more expensive home for homebuyers.
But that’s not all that’s changing in the mortgage industry: two mortgage requirements just came into effect in January that will likely have a big impact on home buyers: the Ability to Repay Rule and the Qualified Mortgages Rule.
What exactly do these new mortgage rules mean for you and your mortgage? For one, your credit and debt load will have a bigger influence on your home loan and the interest rate you qualify for.
Here’s what you need to know about the new mortgage rules and your credit history, and some simple ways to improve your chances of landing a mortgage:
- Your outstanding debt and what you earn has a bigger impact on your mortgage. Thanks to the Ability to Repay Rule, lenders will be looking more closely at two things: your income and your outstanding debt, including credit card balances, student debt and car loans. You debt-to-income ratio – or what you owe versus what you earn each month – is going to have a bigger impact over the type of mortgage and the mortgage terms you qualify for. There are a few ways to improve your debt-to-income ratio: 1) increase your repayment amounts for any outstanding debts, 2) avoid taking on any significant, new debt during the mortgage application process, and 3) consider earning money on the side or asking your employer for a raise to help boost your income.
- Paying off your smaller debts could boost your credit history and your mortgage application. Since lenders now have to document and verify all of your income and debts under the Ability to Repay Rule, your finances will be even more under the microscope – and you’ll likely have to wade through a longer application process. To help shepherd along your application and to increase your chances of qualifying for favorable mortgage terms, you should begin to focus on paying off your smaller debts. If you have a lingering credit card balance or you only have a few hundred left on your student loans, focus on paying off those smaller debts in the short term. The less outstanding debt you have in multiple accounts, the more favorable your mortgage application will look.
- Your overall credit still matters a lot – if not more. The Qualified Mortgages Rule means that lenders are not allowed to push consumers into a higher interest loan just to earn a commission. From the consumer protection point of view, this rule is a winner. But it also means that loan officers will be forced to make smarter loans and will therefore be looking for more qualified lenders. So while your credit history and credit score still mattered significantly in the past, it matters even more now as loan officers will want to be absolutely sure you can repay your debt.
