New mortgage regulations promise greater transparency in what consumers pay for a home loan. Unfortunately, one change may let some people acquire mortgages with payments they may not be able to afford in a few years. Deja vu, anyone?
The Federal National Mortgage Association, also known as Fannie Mae, now considers income from all residents in a home, not just the person applying for a loan through its new HomeReady program. This means money earned by an adult son living in the basement, or a mother-in-law occupying a suite over the garage, counts toward the debt-to-income ratio that determines the amount of a loan.
Fannie Mae, which provides mortgages for people with low or moderate income, trumpets the change as good news, saying it helps “multigenerational and extended households qualify for an affordable mortgage.” But what happens when the grown son moves out, or the mother-in-law passes away? That’s not only possible but likely in some families, since about two-thirds of U.S. mortgages span 30 years.
Other new rules governing home loans are better for both the consumer and the nation. They require that homebuyers receive disclosure documents three days before a closing, ensuring that consumers have ample time to read the fine print and dispute questionable charges. They also make lenders pay the difference if costs change during the application process. And buyers must be told the closing costs at least a week ahead of the closing date.
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These changes, which took effect Oct. 3, make for a longer application process, but they give buyers much-needed time to understand their financial obligations. For most people, a house is the biggest purchase they will ever make; it’s not a decision to be made in a hurry.
Nor should consumers get a mortgage based on anyone’s income but their own. With the mortgage bubble that led to the Great Recession still in the nation’s rearview mirror, both buyers and lenders should be extremely wary of this option.
Remember: Objects in the mirror may be closer than they appear.