If you follow the news, you may have heard about the new mortgage rules which were instated by the Consumer Financial Protection Bureau (CFPB) on January 10th, 2014. These rules, while possibly a little daunting for those hoping to qualify for a loan, were put into action for the simple task of making sure borrowers can actually repay their mortgage.
Still, while the new requirements may seem somewhat strict or confusing, here are a few things that will help you understand the process better:
1.) MOST THINGS WILL STAY THE SAME—One of the major reasons that the housing market collapsed was an overabundance of risky, predatory lending. While much of that activity has already left the market, these new rules simply enact a checks-and-balances system which will make sure lenders are making smart choices.
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2.) MORE DOCUMENTATION—It should probably come as no surprise that new ‘ability to pay’ documentation will be required before loans can be approved. Make a point to gather these documents in advance.
-Current employment status
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-Income or assets for loan repayment
-Monthly payments on any loans also associated with the property
-Monthly mortgage payment for the loan
-Monthly payments for all insurance, property taxes, and possible HOA fees
-Debts, alimony, and child-support obligations
-Monthly debt-to-income ratio
-Credit history
3.) New ‘Qualified Mortgage’ (QM) Guidelines—In order for a mortgage to be considered qualified (and to guarantee certain legal protections), lenders must follow set underwriting and product guidelines. While it’s still possible for them to write loans which aren’t considered “qualified,” they lose a bit of protection if the borrower defaults.
Therefore, most lenders will stick to the new guidelines because they discourage lenders from pushing risky loans.
A qualified mortgage will:
-Have a loan term of 30 years or less
-Have a monthly payment which covers all accrued interest
-Not be an interest-only loan
-Not have a “balloon payment”
-Have upfront points and fees which may not exceed 3% of the total loan amount
-Have a debt-to-income ratio which cannot exceed 43%
4.) MORTGAGE ABILITY EXPECTED TO GROW—In 2014, many experts actually expect mortgage approval to grow because, as interest rates rise and refinancing dwindles, many lenders will try to even the tables by writing more purchase mortgages.
In the end, most consumers won’t see a great deal of change with these new rules because a majority of lenders have already been implementing them for some time.
