If you are planning on selling or buying a new home, it may be a lot tougher in 2014. Last week, the Federal Reserve announced it would take steps to taper the stimulus in the coming months. The expected result is that there will be changes to interest rates that could trickle down to mortgage interest rates. This is on top of already announced changes to government lending guidelines and pending mortgage guidelines in general. All this paves the way for higher interest rates, stricter loan approvals and more difficulty in getting a loan in the coming months. As a result, the process of buying a home may become increasingly difficult.
Higher interest rates alone will not make the process more difficult, but it will have an impact on qualifying ratios and monthly mortgage payments. It is no secret that interest rates have remained near record lows for several years now. Fortunately, many buyers were able to take advantage of them. It appears, however, that those who have not may have missed the boat. The current debt-to-income qualifying ratio is somewhere between 40-45 percent. Any increase in the interest rates will increase that number and leave many buyers unable to get approved for a loan.
Some of the changes set to take effect next year, primarily from the Dodd-Frank act, call for an increase in closing costs, stricter guidelines for determining ability to repay and changes to FHA mortgage guidelines. This is important because the FHA was one of the few places a buyer could go with a minimal down payment. If this avenue is closed, buyers will have to put down 5% more, reducing the number of qualified buyers on a property. This may ultimately cause a gridlock of properties on the market and lower property values in many areas.
Whether or not this will affect property values has been debated, but one thing that is fairly certain is that with loan programs already on the decline the last thing buyers need is to lose the few that were on the table. Increasing interest rates and payments is one thing, but to lose programs and reduce guidelines is another. Nobody thinks that we should go back to 2007 when 100% programs and no income verification loans were rampant, but with the buyer pool already diminishing, the last thing the market needs is to see more programs, and buyers, going by the wayside.
As with most things in the real estate market, it is easy to make snap judgments on what actions will have an impact on others. Time will tell if mortgage interest rates move and exactly what impact stricter mortgage regulations will have on buyers. There has already been a severe reduction in FHA applications and buyers aren’t exactly waiting in line to get a mortgage now, even with interest rates still around 4 percent.
Will interest rates shoot up 2-3% points in 2014? Will the home buying process and costs become the tipping point for buyers? We will find out in 2014. What we know today is that the next twelve months will have a lasting impact for the foreseeable future. Keep your eyes and ears open to what the market is doing and be ready to act to any changes.