The mortgage industry stands on the precipice of radical changes – modifications that are ultimately for the better but, in the short term, may actually slow down home sales. What finishes off 2013 sets the stage for 2014, with the following factors essential for borrowers to understand:

Mortgage Applications Hit a New Low

Last week, analysts found that declining mortgage applications, for both purchasing and refinancing, hit a 13-year low. This record comes from rising home prices and interest rates and the Federal Reserve’s plan to pare the bond purchase stimulus at $10 billion per month starting in January 2013.

Greater Expenses

Last week, interest on 30-year fixed rate loans reached 4.64 percent. At the same time, adjustable rate mortgages returned to July 2008 levels. As TIME magazine pointed out recently, home prices are rising overall, from costs to interests to new fee for lower down payments and credit scores.

Specifically, Fannie Mae and Freddie Mac’s new guidelines add half a point to fixed-rate mortgages starting in March 2014, although some lenders will begin rolling out the new fees starting in January.

Rising prices, however, aren’t all bad. Increased home values resulted in less negative equity, which, in turn, reduced the number of homeowners with underwater mortgages. Forbes, however, pointed out that 6.4 million homeowners still have underwater mortgages, with the greatest concentrations in Nevada, Florida, and Arizona.

New Qualifications

On this blog, we’ve touched on the new rules concerning mortgage qualifications about to go into effect by January 2014. While lenders started implementing them in 2013, all borrowers must be prepared to show more documentation and have their financial situations analyzed thoroughly – not just proof of income and debt-to-income ratio but also other regular expenses like child support payments.

For legal reasons, lending qualified mortgages will be more desirable – especially if a loan goes bad. Three points make a loan “qualified”: points and fees do not go about three percent; terms do not exceed 30 years; and the debt-to-income ratio does not go above 43 percent.