New mortgage rules take effect Friday that set out to protect borrowers against risky lending practices. One of the biggest changes is that borrowers will likely need to show more proof that they can actually afford the mortgage they’re applying for.
Here are two main terms to know from the new rules:
“Ability-to-repay” rule: Mortgage lenders must ensure borrowers can actually afford their loans over the long term. Applicants’ income, assets, savings, and debt against their monthly house payments will be more closely scrutinized. Borrowers likely will need to produce “even more tax records, pay stubs, and bank and investment account information,” USA Today reports.
Qualified Mortgage: Borrowers who meet the ability-to-repay requirements will likely be eligible for a QM. QM loans must meet at least some of the following guidelines: They cannot contain risky features, such as terms that exceed 30 years or interest-only payments; carry more than 3 percent in upfront points and fees for loans above $100,000; or push a borrowers’ total debt above 43 percent of their monthly income unless the loan qualifies to be backed by Fannie Mae, Freddie Mac, the FHA, or a small lender.
Lenders can still issue loans outside of the QM guidelines, but lenders will have to do so realizing they’ll have less protections against future lawsuits.
The Consumer Financial Protection Bureau estimates that about 92 percent of mortgages currently meet QM requirements.
Still, the real estate and mortgage industry, the CFPB, and others will watch implementation of the new rules closely to determine whether they make it more difficult for borrowers to qualify for mortgages.
The new rules may make it more difficult for borrowers who have fluctuating incomes or self-employed individuals to validate their incomes, according to Goldman Sachs. The 43 percent debt standard also may prove a hurdle for some borrowers who find they can’t qualify for the loan they need to buy the house they want, and some borrowers may find they need larger down payments to keep within that 43 percent rule.
The new rules may also cause some delays in lending, at least initially, says Keith Gumbinger, mortgage expert with HSH Associates.
"It'll be a muddy mess until the rules settle in," Gumbinger says.
Source: “New Mortgage Rules Aim to Prevent Risky Loans,” USA Today (Jan. 9, 2014)
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