The newest phrases or buzzwords in the mortgage industry are "qualified mortgage" and "ability to repay". These are part of the Dodd Frank Wall Street Reform and the Consumer Protection Act (Dodd Frank) and provide guidelines for the origination of residential mortgages.
As of January 10. 2014, if mortgage lenders want to protect themselves from consumer lawsuits, they will have to abide by specific lending guidelines set by the Dodd Frank At and enforced by the Consumer Financial Protection Bureau. This will also affect underwriting guidelines moving forward and may make it more difficult to get a mortgage.
At this point, a qualified mortgage will be defined by:
- Limits on loan features including no balloon periods, no negative amortization and no terms over 30 years.
- 3% cap on points and fees
- Debt to income ratio capped at 43% (for loans not eligible for purchase by Fannie or Freddie, or guaranteed by FHA, VA, USDA)
- Verification of all assets and income
- Verification of all debt
These standards were all enacted to verify a borrower's long term ability to repay their mortgage. If these standards are met, the loan is considered a "qualified mortgage".
Underwriters will need to make sure the borrower has the ability to repay their mortgage and that their income is stable.
So what does this mean to those looking for a new home? The mortgage industry is still working on assessing the impact of these new regulations. Many experts think that lenders will have less flexibility when originating loans and will be less likely to make exceptions to their underwriting criteria. It may be very common to see the maximum debt to income ratio at 43% and for those with income that can't be used in qualifying it will affect how much of a home they can buy.
An example may be someone that gets overtime but may not have a two year history of receiving overtime or the employer will not state that overtime is likely to continue. More than likely, the underwriter will not allow that overtime income to be used in qualifying and so the homebuyer will not be able to qualify for as much home as they may have in the past. Another example is a buyer I recently had that was given an option of taking a week of unemployment as they were slow, it could have affected his ability to repay as we had to show he was back at work and unemployment wasn't likely going forward.
This may not affect buyers using FHA and VA, or even those conforming loans under $417,000 sold on the secondary market to Fannie and Freddie, but it will affect those non-conforming loans over $417,000. We may also see Fannie and Freddie adust guidelines to 43% debt to income. At this point it's too early to know all the changes that will be coming.
The most important thing for buyers to know is that there may be more changes in how you qualify for a mortgage and to make sure you are talking to your loan officer about any changes coming. That way if there is a change happening, you will be aware of how it may affect you!