Mortgage Changes Coming in 2014: Should You Buy Now?


Historically low interest rates have made the past few years a good time to buy a home for many Americans. However, some fundamental changes will be occurring in the mortgage market in 2014 that could make it more difficult to buy a home starting next year.

Government-Backed Loan Limits and the CFPB

The first of these is a reduction in the size of mortgages that can be backed by Fannie Mae and Freddie Mac, the two giant federal government mortgage lenders. Currently, these limits range from $417,000 in most areas of the country to $625,000 in some high-cost cities like New York and San Francisco. The Federal Housing Finance Agency has not yet announced what the new Fannie Mae and Freddie Mac loan limits will be.

The second change is the implementation of new mortgage rules by the Consumer Financial Protection Bureau (CFPB), which will go into effect in January. These rules will effectively restrict the types of mortgages private lenders can provide — at the same time that many homebuyers are being pushed into the private market due to lower caps on Fannie Mae and Freddie Mac mortgages.

The reduced government mortgage limits are part of the federal government’s effort to reduce its role in the nation’s mortgage market after the financial crisis. Two out of every three mortgages originated in the U.S. in the second quarter of this year were funded by Fannie Mae and Freddie Mac. Meanwhile, 90 percent of mortgages originated in April were purchased by government agencies, while just two percent were purchased by private investors.

Once the lower Fannie Mae and Freddie Mac mortgage limits kick in, individuals who want to buy homes with mortgages that exceed these limits will have to seek financing from private lenders like banks, credit unions and independent mortgage lenders. Such lenders originate mortgages under their own terms and usually hold the loans on their books, instead of selling them into the secondary market.

As a result, they tend to be very selective in their mortgage underwriting, primarily concentrating on loaning money to affluent borrowers who present a lower risk of default on the loan. They also tend to require higher down payments of at least 25-30 percent, while Fannie Mae and Freddie Mac mortgages can often be obtained with 20 percent down.

In addition, many private lenders may only offer home buyers adjustable-rate mortgages (or ARMs) instead of fixed-rate mortgages. ARMs offer a fixed interest rate only for a set period of time, such as five years — after this time, the interest rate will adjust to reflect prevailing market rates. With mortgage rates currently near historic lows, many financial experts recommend that home buyers try to lock in these low rates with a fixed-rate mortgage instead of exposing themselves to potentially higher rates a few years down the road.

Finally, private mortgage lenders have historically charged higher interest rates than loans backed by Fannie Mae and Freddie Mac. Lately, these rates have been near, and in some cases even lower than, the rates on government-backed loans. As more homebuyers enter the private mortgage market, they could rise again in relation to government-backed loans.

What To Do Now?

If you are planning to buy a home in the near future and your mortgage will be near the current government-backed loan limit, it might be wise to try to complete the purchase before the end of this year. Waiting until next year could end up resulting in fewer mortgage options and higher costs.

Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities. Member FINRA & SIPC.


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