On January 10, 2014 new mortgage rules from the Consumer Financial Protection Bureau (CFPB) were implemented by lenders. There are two basic components of the rules: The Ability to Repay Rule (ATR) and the Qualified Mortgage (QM). The CFPB has characterized these new rules as a “back to basics” approach to lending intended to reduce the risk of foreclosures.
Ability to Repay Rule
Under the Ability to Repay Rule, lenders are required to calculate the borrower’s ability to repay the loan over the life of the loan. To do so, they will verify and document assets, income and liabilities of the borrower, calculate a debt to income ratio and review credit history. The requirement to verify and document these items eliminates the ability to do certain loans that were seen in previous years, such as “low-doc” and “no-doc loans”, also referred to as stated income loans. However, most lenders have not offered these types of loans in several years. This requirement also eliminates being able to qualify a borrower based on a low “teaser” rate that is only available for a short time. If the loan has a rate that increases over its term, the lender must also make a reasonable effort to determine whether the borrower will be able to afford the payment under the higher rate as well. This will help to prevent borrowers from finding themselves in trouble when interest rates adjust resulting in higher payments down the road.
Qualified Mortgage Rule
The Qualified Mortgage Rule (QM) establishes a new category of loans that must meet certain criteria. Loans that fall into this category will be presumed to meet the ATR rule above. To be considered a qualified mortgage, the loan must have no negative amortization, no terms longer than 30 years, no interest only payments and no balloon payments. In addition, the borrower’s debt to income ratio cannot exceed 43% and certain upfront points and fees that a lender may charge are limited to 3% of the loan amount.
Many borrower’s have expressed concern about the 43% debt to income ratio limit and fear that it will make getting a loan more difficult. However, there is currently an exception in place until January 2021 for loans that underwritten under Fannie Mae, Freddie Mac, FHA and USDA rural housing guidelines.
While some fear that these new rules may prevent homebuyers from obtaining financing, particularly first time homebuyers, , there are others who feel that these rules may cause lenders to loosen up credit standards, as there is now specific guidance for them to follow and use to defend their underwriting decisions. The CFPB estimates that approximately 95% of the loans currently being originated would still qualify under the new guidelines.
Answers To Your Questions
If you have questions about whether you will qualify to purchase a home, a Marimark Mortgage loan consultant is always available to assist you.