Starting January 10, 2014 the Consumer Financial Protection Bureau (CFPB) initiated new mortgage rules. The main goal of these rules are to to ensure that the borrower can afford to repay their mortgage. We have listed four main things that you need to know:
It is not a drastic change.
The new changes were created to dissuade predatory and risky lending, which was the cause behind the housing recession. Much of this high-risk activity had already disappeared before 2014\'s implementations because lenders have been working their way towards the new rules for the past year. Almost 90% of 2012 mortgages already followed the new rules.
More documentation is required to prove your “ability to repay”.
Lenders must follow these guidelines and gather this information when approving a loan:
- Income or assets you will rely on to repay the loan
- Current employment status
- Monthly mortgage payment for the loan
- 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 (HOA) fees
- Debts, alimony and child-support obligations
- Credit history
Most lenders will follow “new qualified” (QM) guidelines
With QM guidelines, mortgages are considered “qualified mortgages”, and both the lender and the borrower will have certain legal protections if the borrower defaults the loan. It is still possible for lenders to write loans that are considered “qualified mortgages”, but because they would be without borrower default protection, they are more likely to follow the QM guidelines. The guidelines help serve as a barrier to keep borrowers from signing a loan with excessive upfront costs that are likely to cause default. In order to be considered a “qualified mortgage” it 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
- Upfront points and fees must not exceed 3% of the total loan amount
- Debt-to-income ration may not exceed 43%
Zillow predicts that 2014\'s mortgage availability will widen
As interest rates rise and refinancing dies down, lenders will need to make up for it by writing more purchase mortgages – directly benefiting consumers.
All in all, most of these changes have already been in effect for a while. The rules have only just become official, but they have been in practice so there is no shocking change.
See Zillow\'s feature here.
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