Surprising Impact of Home Financing Rule Changes

If you haven’t applied for a mortgage in a few years, you may not be aware of how mortgage financing has changed.  Rules have tightened; paperwork and back up documentation requirements are more rigorous.  But, most importantly, your purchasing power has significantly decreased. 

Example Couple – How All the Small Changes Add Up

Let’s look at a couple and the differences in what they could buy under the prior rules and today’s tightened environment.  My example couple is two income earners, one making $35,000 and one making $40,000. They have good credit with scores at 720 with no debts.  They have a 5% down payment saved.

Currently – Maximum purchasing budget is $440,000* with a $22,000 down payment plus closing costs.  Amortization is 25 years. 

2008 Rules – Maximum purchasing budget is $675,000* with a $33,750 down payment.  Amortization is 40 years.  They would also have had the option of purchasing at a higher interest rate with no down payment at all.  

3 Years = Loss of $235,000 in purchasing power!

This is just one of many examples.  For self-employed individuals and rental purchases, the changes are even more drastic.

*approximate, using current interest rates.

What does it mean for you?

• Don’t make assumptions, get pre-approved.  Now, more than ever, a thorough pre-approval can help you understand your financing options.  Many people assume because they purchased before you can afford at least that much again.  Or, when you were looking four years ago you were told your maximum budget and so that’s what you are looking at today.  This could be vastly different under today’s lending guidelines.

• Paper, paper, and more paper.  Anticipate having to prove every part of your mortgage application.  The documentation requirements are far tighter today than they were several years ago.

• Lender knowledge matters.  In this environment, every dollar of qualifying income counts and slight differences in lender policy can have a big impact.  How your deal is presented to a lender, and which lender you choose, will determine your approval.  Work with experienced professionals to maximize your purchasing power.