Stressed about the new mortgage stress test? You should be. As of January 1, 2018, there are new mortgage rules taking effect, including a stress test for uninsured borrowers.
To understand what this means you need to know the following:
Insured borrower: A home buyer with less than 20% saved up for a down payment.
Uninsured borrower: A home buyer with more than 20% saved up for a down payment.
As of January 1, 2018, all new home buyers—as well as homeowners who wish to refinance or decide to shop the market when it comes time to renew their mortgage—will have to qualify for the posted five-year fixed rate. Historically, the posted rate is about 2% higher than the discounted rates banks typically offer borrowers. What does this mean? Theoretically, it means if you secure your mortgage on Dec. 31, 2017, you could qualify for the mortgage using the discounted rate, which currently sits near 2.89%. Wait a day to secure that mortgage loan and you’ll need to qualify for the mortgage based on the posted rate of 4.89%. That’s a big difference and it’s going to take a big bite out of your house-buying budget.
Wait, it’s worse. While the target deadline for this new mortgage stress test is Jan. 1, 2018, that doesn’t mean new mortgages, refinance loans or new renewals arranged before the first day of the New Year won’t be subject to the new mortgage stress test. “For preapprovals issued between Oct. 17 and Dec. 31, 2017, the lender can choose which rules to apply (unless they’ve implemented the new stress test prior to the deadline),” explains independent mortgage broker and Ratespy.com founder Robert McLister. To be safe, call your preapproval lender to confirm what conditions you are subject to prior to finalizing any deal. If you don’t, you could be on the hook for making up the difference.
How much is that difference? A lot. According to our calculations, buyers risk losing anywhere from 8% to 25% of their purchasing power, depending on their debt, how much they’ve saved for a down payment and the strength of their income source (among other factors).