A new law that came into effect on Jan. 1st will make getting a larger mortgage more difficult for some, and that could potentially have some negative effects on the housing markets in Los Feliz, Silver Lake and other pricey local zip codes.
Designed to prevent a repeat of the debacle of the late 2000 housing crisis, when many mortgages were signed off on without income verification, and “gimmick” loans like interest-only appeared, the new law caps the amount of debt a buyer can assume relative to their stated income at 43%.
That’s particularly noteworthy in markets where many homes need so-called “jumbo” mortgages, which are loans that are not backed by the Federal Housing Administration.
The current national FHA mortgage limits are $417,000, but parts of Los Angeles are exempt, with limits that range as high as $625,000. Those without a huge downpayment or perfect credit may face problems.
“It definitely tightens the qualification guidelines for the not-so-financially strong borrowers,” says Maynard Maceda, a senior financing consultant who workers with many local residential realtors. “Last year some lenders could approve loans with high 40% ratios with good compensating factors. The qualifying rate on hybrid adjustable-rate mortgages (ARM), such as 3/1 and 5/1, have been increased. The 3/1 ARM uses a qualifying rate of 6% over note rate and the 5/1 ARN uses a 2% add-on to note rate.”
Bottom line: “This makes it harder for borrowers to qualify,” Maceda said. ”This is designed to entice applicants to go with the traditional 30-year fixed rate.”
Ted Ark, a mortgage broker with Golden Mortgage in N.J. who works in several markets and is familiar with California, said the new law “will hurt the small guy more than the person making a couple hundred grand,”a year.
Many wealthier buyers deal with private bankers and institutional portfolios, so the new law will not affect them. However, Ark notes, “a few of the lenders stopped working with brokers because of this new law. They don’t want the exposure to rogue brokers.”
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