The basic purpose of the new rules, which resulted from the Dodd-Frank Act passed in 2010, is to help make sure you — the borrower — can afford to repay your mortgage.
Here are four things you need to know:
1. Not a whole lot is changing
These new rules are designed to discourage the kind of predatory and risky lending that was rampant in the years leading up to the housing recession. Much of that lending activity already has disappeared from the market. Most lenders have been working to implement the new rules for about a year now, and roughly 90 percent of mortgages written in 2012 already complied with the new rules from CFPB.
2. New ‘ability to repay’ guidelines will require more documentation
Lenders are required to check and verify all of these items before approving a loan:
- Income or assets you will rely on to repay the loan.
- Current employment status.
- Monthly mortgage payment for the loan. (The rule requires that for adjustable-rate loans, lenders must calculate the payment using the higher of the introductory or fully-indexed adjustable rate.)
- Monthly payment on any other loans associated with the same property.
- Monthly payments for property taxes and insurance that you are required to buy, and certain other costs related to the property such as homeowners association fees.
- Debts, alimony and child-support obligations.
- Monthly debt-to-income ratio that compares the borrower’s total debts with total income.
- Credit history.
Do yourself a favor and gather as many of these documents in advance of applying for your loan. And no matter what, be prepared to be asked for additional documents once the approval process has started.
3. Most lenders will follow new ‘qualified mortgage’ (QM) guidelines
If lenders follow the underwriting and product guidelines when they write the loan, the mortgage is considered a “qualified mortgage,” and both the lender and the borrower will have certain legal protections in the event the borrower defaults on the loan.
Lenders can still write loans that aren’t considered “qualified mortgages,” but because they will lose some protection if the borrower defaults, they are likely to stick to the new “qualified mortgage” guidelines.
These guidelines discourage lenders from getting you — the borrower — into a loan with excessive up-front costs or “exotic” features likely to cause default. To be a “qualified mortgage” a loan must:
- Have a loan term of 30 years or less.
- Not have negative amortization (monthly payment must cover all the interest due).
- Not be an “interest only” loan.
- Not be a “balloon payment” loan where a large lump sum of the principal is due back at one time (exception made for small lenders).
- Upfront points and fees must not exceed 3 percent of the total loan amount. *Note: This cap on points and fees may make lenders less likely to offer smaller loans (less than $100,000).
- Debt-to-income ratio may not exceed 43 percent. *Note: This can be superseded if the loan is originated and kept in portfolio by a qualified small lender, or if the loan is approved by FHA, VA, USDA, RHS, Fannie Mae or Freddie Mac. But it may become harder for people with higher debt loads to get approved for a new home if they cannot stay below the 43 percent debt-to-income ratio.
4. In 2014, Zillow actually expects mortgage availability to widen
A lot of lenders have done brisk business doing only refinance loans over the past couple of years. But as interest rates rise and their refinance business dwindles, they’ll need to make up the slack by writing more purchase mortgages. This is good news for consumers.
Bottom line: You won’t see very much change even though these new rules are in the news today, because most lenders have already implemented most of these changes.
- Understanding the Qualified Residential Mortgage
- Getting Approved: How Lenders Judge You
- Understanding the New Ability to Repay Rule