Qualified Residential Mortgage
Are you aware that there is a move in Washington which could require a minimum down payment of 20% on the purchase of a home? It’s called the Qualified Residential Mortgage, commonly referred to as the QRM Rule.
The rule as proposed could have the effect of requiring borrowers to have a 20% down payment on the purchase of a home in order to qualify for the best mortgage interest rate. The QRM is just one part of the Dodd–Frank financial regulation bill that was supposed to require lenders to do a better job of underwriting mortgages. Want to obtain more information about the Qualified Residential Mortgage, read this information provided by the National Association of REALTORS and or see what Google has found.
Many year ago when I entered the real estate business, 1971 to be exact, the first thing I educated myself on was qualifying a buyer. There were mortgage payment qualifying guidelines then and there are mortgage qualifying guidelines now. Whether the mortgage was Conventional, VA or FHA, there were down payment and income guidelines for each type mortgage loan, such as the 28%/36% Rule. Simply stated, a borrower’s monthly mortgage payment(PITI) should not exceed 28% of their montly gross income(front ratio) and the monthly payment plus monthly recurring debt should not exceed 36% of monthly gross income(back ratio).
A very simple guideline, but one that truly stood the test of time for mortgage qualifying.
And then, the real estate frenzy started in 2002 and carried through early 2006. Buyer demand exceeded available listings. Buyers were moving up into larger homes, they were purchasing second homes, they were purchasing rental homes and condos and they were looking to purchase fixer uppers and flip them. There was a buyer for every listing that came on the market. And more ofter than not, buyers were stepping over each and outbidding others just to purchase a home.
And yes, there were many buyers who were purchasing homes that were beyond their financial income limits. But, what about the mortgage qualifying guidelines that have stood the test of time for so long?
Well, the banks wanted in on this real estate and mortgage borrowing frenzy too! They loosened qualifying guidelines and increased income qualifying ratios. What was once a 28%/36% qualifying guideline became 41%/46%. To help even more buyers, many lenders also allowed the buyer to borrow the down payment for the home purchase in the form of a second mortgage. And on top of that, a home buyer was also able to negotiate the contract offer where the home seller would be paying for buyer closing costs as a seller concession. That was done by negotiating the sales price with buyer closing costs lumped in.
Great mortgage rates, great lender qualifying, a dream come true for home buyers!
Fast track forward to the period between mid 2006 and the present, in no special order. The financial mess on Wall St. The government bailout. Potential home buyers stopped looking. Real estate values weakened, then dropped and have continued dropping in most all areas of the country. Lenders started qualifying buyers again using appropriate qualifying standards. The economy weakened and, from a public perspective, is still weakening. What double dip, we never got through the first dip! Job layoffs started, and are continuing with no end in sight. Unemployment rampant, with no end in sight. New employment opportunities? Where? Late mortgage payments? In more families than could ever be imagined! Mortgage delinquencies? Foreclosure notices? Short sales? Foreclosures, becoming impossible to track due to the shear number of families affected. The list could go on!
Talk about the “perfect storm”!
I am a REALTOR. I am not an Economist, Banker or Government Regulator. I do believe that any consideration to a change in mortgage financing which would require a buyer to have a 20% down payment in order to obtain the best mortgage interest rate will not fix what is all wrong right now in the banking industry or in the US economy. I do believe that any mortgage regulation which forces home buyers with less than 20% down to obtain a mortgage loan with higher fees and higher interest rates would hinder the ability of many potential buyers from obtaining affordable housing.