Last week, the Consumer Financial Protection Bureau’s (CFPB) new qualified mortgage rule went into effect. It is also known as the ability to repay rule. This is designed to help borrowers understand the true costs of the mortgage they apply for. It is also designed to keep lenders from lending money to borrowers who can't afford to make those monthly payments over time.
If this works as they plan, the number of foreclosures should drop in the coming years and some of the conditions that helped create one of the biggest real estate bubbles in US history will be eliminated.
To be considered a qualified mortgage, a lender may not charge excessive upfront points and fees (capped at 3 percent of the loan), and the loan cannot be longer than 30 years in length. We use to see a few 40 year mortgages and those are now gone.
Also, interest-only loans and negative amortization loans (where the monthly payment doesn’t cover the true cost of the interest, so the total amount of the debt grows each month) will not be considered qualified mortgages.
No-doc loans, also known as stated-income loans because the loan officer would just write down how much the applicant said he or she earned and not verify that information, have been eliminated. Most of these loans disappeared over the last few years. Sub-prime loans also disappeared.
Starting this week, if you apply for a mortgage, you have to be able to prove that you can afford to repay it in full. In addition, the loans must fall into one of three areas: The monthly loan payment plus the borrower’s other debt payments cannot exceed 43 percent of the borrower’s gross monthly income; the loan must qualify to be purchased or guaranteed by a government-sponsored enterprise (such as Fannie Mae or Freddie Mac) or to be insured or guaranteed by a federal housing agency; otherwise, the loan must be made by a smaller lender that keeps the loan in its portfolio and does not resell it.
As the CFPB Web site puts it: “The ability-to-repay rule is intended to prevent consumers from getting trapped in mortgages that they cannot afford, and to prevent lenders from making loans that consumers do not have the ability to repay. It’s that simple.”
What all this means to those that want to buy a home is that we will have to add a few steps to the mortgage qualifications. We still do the same things we have been doing – collecting paystubs and w-2's, bank statements and other documentation, but we will have to make sure we meet certain criteria. When we calcuate closing costs, we have to make sure we are within the new guidelines and that we are not over the HPML (high priced mortgage loans) limits. If we are, we need to adjust the closing costs to be within guidelines. For the test cases I have done, I have not had an issue with the new guidelines.
Underwriters will be looking to make sure that you have the ability to repay the loan, that your income is stable and will continue.
We may see higher costs for mortgages due to increased compliance costs. This is something that is still unknown at this time. If you currently have a pre-approval, you may want to talk to your loan officer and make sure your loan meets the new guidelines.