Feb. 26, 2018.
Buying a house isn’t something anyone should rush into. But the major changes to mortgage insurance announced for March 1, 2018, have new buyers scrambling. Is now the time to get prequalified for a home loan before conventional mortgage insurance guidelines tighten up?
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How will mortgage insurance change on March 1?
An even better question. What is mortgage insurance, and how does it affect your monthly payment when you’re buying a house? You may be paying conventional/private mortgage insurance (PMI) if the down payment on your home was less than 20 percent. “In the mortgage business, it takes a village,” Scott Cummins at Cornerstone Home Lending, Inc., says. “A key member of that village for buyers with less than 20 percent down is mortgage insurance or PMI.”
Homebuyers who pay less than 20 percent down are charged mortgage insurance as a way to protect the lender in the event of a mortgage default. You can read our full PMI guide here — and learn when and how you can drop this insurance.
Now to the second question. How is mortgage insurance going to change on March 1, 2018? Big changes are coming for potential homebuyers, loan officers say, as many national mortgage insurance companies tighten their conventional mortgage insurance guidelines.
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These changes apply to conventional mortgage insurance (the PMI on any home loan not guaranteed by the government) and include:
1. Stronger credit score requirements. A buyer with a FICO credit score of 700 or less will now have a maximum allowable DTI (debt-to-income ratio) of 45 percent. Find out how your credit score is calculated and learn a simple way to clean up credit here.
What loan officers say: “Borrowers who have a credit score less than 700 will need to reduce debt, put more money down, or change to a non-conventional mortgage, such as FHA,” Cummins says. Currently, Cummins explains, the FHA loan program allows for higher debt-to-income ratios and does not have the hard credit score requirement.
2. Inflexible DTI requirements. As of March 1, there will be no more leeway with the 45 percent DTI guideline. Meaning, lenders will no longer be able to let a DTI of 46 or 47 percent slide with automated underwriting approval.
What loan officers say: For buyers who no longer qualify for conventional mortgage insurance within the more stringent guidelines, there are other financing options available. In this case, Lori Richardson, Vice President at Cornerstone, says, getting with an experienced lender to revisit all your options is important. Another alternative, says Richardson, is to ask your lender about lender-paid insurance. Lender-paid mortgage insurance is used by some buyers to increase their purchasing power and upgrade their housing price range, though FICO credit minimums and DTI maximums still apply.
There’s a mortgage that’s right for you. (And many have a low to no down payment.)
“An FHA loan or a down payment assistance program may be a good choice, but the bottom line is to take time to reevaluate your financial position from a holistic perspective,” Richardson says. “Knowledge is power.” Consider a different price range. Put more money down. Or, restructure other debts to move you closer to your goal of homeownership.
Cummins agrees. He suggests to his borrowers who may be affected by the new mortgage changes — those shopping under the assumption of a conventional loan — that they may want to check and make sure the members of their “loan village” are still on board with their house-hunting goals and price bracket.
What if you’re already prequalified but haven’t closed by March 1?
Without fully understanding these new mortgage insurance guidelines, Richardson says it’s possible for a buyer to get caught off guard and get denied for a loan — even after being prequalified.
For the many buyers in limbo who have already prequalified for a mortgage but will not close on a house before March 1, 2018, Richardson suggests meeting with a loan officer and playing with the numbers. “The debt-to-income ratio will be capped at 45 percent effective March 1. So, it may make sense to look at alternative loan programs, different price ranges, or down payment options,” she says.
We can help.
If you’ve been prequalified for a home loan, Richardson says it’s time to get with your lender. Your loan officer can reevaluate your loan options to see what makes the most financial sense based on your specific short and long-term goals. If you haven’t been prequalified for a home loan yet, that part’s easy. Download the free LoanFly app, submit your information, and get prequalified from anywhere in minutes.*
*During normal business hours.
For educational purposes only. Please contact your qualified professional for specific guidance.
Sources deemed reliable but not guaranteed.