New home mortgage guidelines went into effect on January 10th. The new guidelines were drafted by the Consumer Financial Protection Bureau and they are designed to protect consumers from some of the lending abuses that led to the financial meltdown in 2008. Lending practices were relaxed prior to 2008. This enabled some people to qualify for home loans who would not have qualified under the previous and stricter guidelines. When the market imploded, millions of people were unable to make their mortgage payments and lost their homes to foreclosure.
To counter this practice, the Consumer Financial Protection Bureau created a new category of home loans that limit up front fees for borrowers. In return for offering these loans, lenders are given broad legal protection from borrower lawsuits. These loans have limited fees and won’t allow no-interest periods, this protect borrowers from being stuck with a loan they can’t sustain.
In order to qualify for these new loans, lenders are required to verify a borrower’s income, assets, and debt prior to approving a new loan. Borrowers, in turn, must meet more stringent debt to income ratios. The new maximum debt to income ratio is now 43%. Craig Jarrell of Iberia Bank Mortgage explained to me the debt to income ration comprises all a person’s total monthly debts including installment loans, credit card minimums, car payments, student loan repayments, and the house payment. Mortgage lenders refer to this ratio as the back end ratio.
The front end ratio is made up of the total house payment which includes principal, interest, PMI, HOA dues, and home insurance. Lenders want this ratio to be no more than 30% of a person’s monthly income. Even for traditional mortgages that are not a part of the new consumer protection program, the back end ratio should not exceed 45% of monthly income.
What does this have to do with home insurance? Significantly more than home buyers in north Texas realize. Home insurance premiums have consistently risen over the last 18 months. Higher premiums constrict both ratios and even a difference of a few hundred dollars in annual premium can make the difference between qualifying for the mortgage on your new home and being declined. With this in my mind, I recommend anyone planning to buy a home consider pre-shopping your home insurance before making an offer on a home.
Pre-qualifying for a mortgage is the first step most people make before shopping for a home. Once qualified, you’ll know your debt to income ratio. Pick a home in your desired neighborhood and run home insurance quotes on it. Look at several options to make sure you stay within an acceptable ratio. By comparing home insurance options with your ratios before making an offer, you’ll know whether or not you’re within acceptable ranges. Don’t scrimp on coverage or go with a deductible that’s so high you can’t afford to replace the roof or file a claim.
What do you think? Share your comments, questions, and suggestions with me in the comments section of our blog or on our Facebook page. I’d love to hear from you.