What you need to know about mortgages

Journey isn’t the only one who’s confused. “There’s a lot of turmoil in the marketplace right now,” says Charles Ferraro, president of William Raveis Mortgage in Westford.

Three and a half years ago, with much input from now Senator Elizabeth Warren, an independent arm of the Federal Reserve called the Consumer Financial Protection Bureau was created as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Since then, the organization, which consolidates federal consumer financial protection authority previously handled by several agencies, has been creating new borrowing requirements in part to eliminate the shady mortgage practices that led to the financial meltdown. The rules — about 2,000 pages’ worth — went into effect on January 10 and will probably cause some uncertainty for the next few months. “The changes are extremely detailed,” says Ferraro. “There are a lot of ifs and buts and a lot of questions out there. Lenders will be double-dotting I’s and triple-crossing T’s and then double-checking everything again.”

New regulations always take time to sort out, he adds. “This is an automated business. Systems have to be changed, people have to be educated. Brokers, lenders, investors — all those parties have to come together and figure out how to do it.”

For some lenders, the new rules may not change the way they do business that much, because many have been more conservative anyway since the financial meltdown. But for others, says John Battaglia, president of Cambridge Mortgage Group of South Shore Bank in Hingham, there may be more fallout. “I hope in the long term it will help keep good lenders in play and keep out bad actors,” he says. “But any time you have such specific rules, it leaves out the judgment of the underwriter” — the person who decides whether and how much you can borrow and what the terms of the loan will be.

The big news is the codification of the ability-to-repay rule, which requires lenders to verify consumers’ financial information “to the nth degree,” according to Ferraro. If this rule is met — along with quite a few other requirements — the loan is considered a qualified mortgage, or QM, and the lender will have some protection from lawsuits by consumers claiming the loan terms are unfair or that they were sold a mortgage they didn’t understand and couldn’t afford. Lenders can make loans that are not qualified, but, Battaglia notes, “What [they’re] grappling with is what is the risk of doing a loan outside of QM?”

Qualified mortgages also require that a borrower’s monthly debt, including the loan, can no longer exceed 43 percent of his or her monthly pretax income. For the next seven years, government-backed conventional loans from Fannie Mae, Freddie Mac, the Federal Housing Administration, the Department of Veterans Affairs, and the Department of Agriculture’s Rural Development program — which together make up about 90 percent of the mortgage business in the country — don’t necessarily have to adhere to the 43 percent rule. But these loans are underwritten by your local mortgage lender and then often sold to Fannie and Freddie. And many lenders will choose to adhere to the 43 percent — or even stay below it — just to be sure that the government will take the mortgage.

“Yes, they can exceed 43 percent,” explains Ferraro, “but they don’t know how doing that will shake out till they position their underwriting. Some of the lenders say, ‘We’ll take the ratio cap down to 41 or 42 [percent] to make sure we don’t exceed it.’ Others are saying, ‘We used to be able to go up to 45; we’ll just hang there and see how the system responds.’ This is the problem with the regulations. They tossed a lot of stuff at the industry and just expect us to figure it out. They’re not offering a lot of clear guidance.”

Poor credit scores are also becoming a bigger hindrance for aspiring home buyers. A score of 620 used to be enough for a conventional mortgage, but that has changed in the past few years. (The average score nationally is 665, according to three national credit reporting agencies.) Today, Battaglia says, it’s “pretty doubtful” he could do a mortgage for someone with a score of less than 650. “With the loans we’re seeing through Fannie, Freddie, and the FHA’s automated underwriting system, it seems like ones with scores below 650 are not getting approved.” And loans to those with scores as high as 720 may cost more than they used to. “There are tiers,” says Battaglia. “If you had 20 percent down on a $500,000 house with a 680 credit score, you’d pay 4.875 percent interest with no points. At 700 it would be 4.625, and anything over 740 would be 4.5.” That’s more than a $32,000 difference over the life of the loan.

The moral of the story for consumers may be, if you don’t succeed with one lender, try again. But even when you find someone who will do your loan — whether it’s a first mortgage or a refi — the process will probably be longer, and closing will be more expensive. Lenders are discovering that they have “to employ compliance personnel to oversee everything and make sure it’s done in accordance with the new restrictions,” says Andrew Marquis, a loan officer with Prospect Mortgage in Newton. Those costs could get passed on to the consumer.

Also, you “really have to be prepared to document,” says Battaglia. Two years of tax returns, two months of bank statements, a month’s worth of pay stubs, and proof for the reasons behind any large deposits should do it for many people, but there are occasional surprises. Journey and Yosifon, for example, had to provide their children’s birth certificates to show they would continue to receive their state adoption stipends for a few more years.

Weighing the Options

Veterans, rural, and so-called Indian loans all have strict eligibility requirements, but loans backed by Fannie, Freddie, and the FHA are available to all. With Fannie and Freddie, you may need to put 20 percent down, but could get away with as little as 5 percent under certain circumstances. The catch is that with a lower down payment, you have to pay private mortgage insurance, also known as personal mortgage insurance. For Fannie and Freddie, you need to carry the insurance only until you achieve 20 percent equity in the house. For FHA mortgages, though, you now must keep it for the life of the loan. Insurance fees vary, depending on the size of the loan and the down payment amount, but they may be as much as 1.15 percent of the loan. On $300,000, that could come to a whopping $103,500 over the 30-year life of the loan.

Understandably, many people are shying away from FHA loans. But even if you have a low credit score and a modest down payment, there are still products available through special programs:

1 | The Neighborhood Assistance Corporation of America (888-302-6222, naca.com) has a product that “sounds extraordinary,” says founder and CEO Bruce Marks, “but we’ve been getting people through with it for more than 20 years.” It is a no down payment, no closing cost, no fee 30-year fixed-rate loan at 1 percent below the prime market rate for the purchase, or purchase and rehab, of a one- to four-family home, a condo, or a co-op. There are no income limits, but the average NACA borrower has a salary of $35,000. Your credit score doesn’t hold as much weight as it does with private lenders because the group bases qualification on individual circumstances. There are, of course, certain requirements:

> You must be a group member in good standing; the fee to join is $20.

> No member of the household can own another property when applying for the loan.

> You must live in the home for the life of your NACA-held mortgage.

> You must participate in at least five activities a year in support of the group’s mission.

NACA is not only a mortgage lender but also an economic advocacy group, so members have to commit to activities like joining demonstrations, volunteering in the office, or assisting other members with the home-buying process.

2 | Through its Boston Home Center (617-635-4663, cityofboston.gov/dnd/bhc), the city’s Department of Neighborhood Development has three programs for first-time home buyers of one- to three-family homes or condos in Boston whose household income does not exceed 120 percent of the area’s median — $90,600 for a family of two. You can get a loan for up to 3 percent of the purchase price for the down payment and closing costs for any kind or property, and up to $20,000 for the down payment and closing costs on a three-decker or for the purchase and rehab of a foreclosed property. The program also takes into account borrowers’ assets. “If you’ve got $300,000 in the bank,” says Sheila Dillon, director of the Department of Neighborhood Development, “we’re not here to help you. You don’t need us.”

For every year you stay in the house, 20 percent of the down payment and closing cost payout is forgiven. So if you live there for only one year, you’d have to pay back 80 percent of the money, but if you stay five years, the money is considered a grant, and you’re in the clear.

3 | MassHousing (888-843-6432, masshousing.com) is a quasi-public agency charged with increasing affordable housing in the Commonwealth. It offers low fixed rates with low down payment requirements, flexible underwriting, and relatively high household income limits, ranging from $76,140 in Berkshire County to $128,790 in Nantucket County. “We’re among the older housing finance agencies in the country,” says the organization’s executive director, Tom Gleason, “and our lending has been stronger over the last two years than in our 47-year history.” He cites $1.25 billion in single-family loans and another $350 million for multifamily loans in the fiscal year ending June 30. “We never did no-down-payment, no-income-verification loans. We always did it the old-fashioned way. Our sweet spot is people with modest incomes and low down payments.”

4 | The Massachusetts Housing Partnership (617-330-9955, mhp.net), a quasi-public nonprofit affordable-housing organization, has a program called ONE Mortgage — recently changed from SoftSecond. For first-time buyers with less than $75,000 in liquid assets and an income of $33,400 to $75,460 for one person, depending on what region you live in, it offers loans with down payments as low as 3 percent with no private mortgage insurance. Income-eligible buyers may also qualify for subsidies in the first seven years of ownership.

The Massachusetts Housing Partnership, like MassHousing, is exempt from some of the qualified mortgage rules, which gives it a little more flexibility. “Some first-time home buyer mortgage programs with proven track records did get exemptions,” says Gina Govoni, the partnership’s director of home ownership. A 660 credit score for single-family purchases and 680 for multifamily purchases is needed, however, and, like all of these programs, ONE Mortgage also requires borrowers to take home buyer education classes through one of the 50 or so home buyer counseling agencies throughout the state.

Rethinking Your Home Search

Even if you end up not qualifying for as big a loan as you’d like, there are still ways to get into a house you love. First, consider a multifamily, which can help to increase your bottom line since mortgage companies will take into account up to 70 percent of the potential rent when figuring the amount you can borrow. Rent-to-own agreements — in which the seller essentially acts as a bank, requiring a certain amount down and a fixed monthly payment — are a good option when credit is tight, though they’re usually not preferred for the long term because they tend to favor sellers. Because rent-to-owns carry no commission, realtors won’t help you with them, but you can find them yourself on Craigslist and at rentuntilyouown.com.

It’s also still possible, even with today’s tougher underwriting standards, to get part of your down payment in the form of a grant or gift — if, say, you’ve got relatives willing to help you out. For FHA loans, the whole 3.5 percent down payment can come from a gift; the same goes for 3 percent down loans from MassHousing and 20 percent down conventional loans. For conventional loans with less than 20 percent down, at least 3 percent has to come from the buyer and the rest can be a gift. “If you’re only putting 5 percent down,” says Marquis, “that gives you 5 percent equity in the property. With such low equity, they want skin in the game” — for the buyer to assume some monetary risk. Like everything else these days, gifts have to be fully documented, with a signed letter, a copy of the check from the donor, and the buyer’s bank statement showing the deposit of the funds.

Finally, think about broadening your search. “Buyers shouldn’t limit themselves to geographic areas,” says Alisha Lawton of Lawton Properties Real Estate and Insurance in Braintree. “It’s great to have a desire but important to be open. The perfect house may not be where you started looking, but it may be perfect for your wallet.” City lovers might want to try Chelsea or Roxbury’s Fort Hill, for example, over South Boston or Back Bay. Those looking in the suburbs will find better prices in Medford than Arlington, for example, and in Waltham than Wellesley.

“Frankly, I think even if you can get the mortgage,” says Paul Campano, an agent and vice president with Keller Williams in Cambridge, “look for something that’s going to grow.” Cambridge is a solid investment, he points out, but “you pay a premium to get into it, and appreciation will never go through the roof.” The median condo price in East Boston, on the other hand, grew by 32 percent from 2012 to 2013.

Even if you insist on your first-choice neighborhood, Lawton says, there are still ways to get more bang for your buck. “You may want a four-bedroom but have to go with a three,” she notes. “If you have two boys and a girl, put the boys together or convert the basement or attic. A house has to meet the needs of the family. Don’t sacrifice everything, but have some flexibility.”

She also suggests checking out places that need a little work. “Look at it and say, ‘What can I do myself that won’t cost an arm and a leg, and what can I live with?’ Some people say, ‘Oh, the bedrooms aren’t facing the sun.’ Really? As an agent you have to constantly ask, what are the must-haves? Then you work from that to the desires and from the desires to the dream.”

MORTGAGE SNAPSHOT

According to Bankrate.com’s January 22 survey of large mortgage lenders, current benchmark rates for Boston are:

> 4.54%

30-year fixed

> 3.54%

15-year fixed

> 3.16%

5-year arm

> 4.68%

30-year jumbo

 Elizabeth Gehrman is a frequent contributor to the Globe Magazine. Send comments to magazine@globe.com .