The Consumer Financial Protection Bureau (CFPB) recently published new mortgage rules, which lenders have recently implemented. The rules have two essential components: 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 the borrower’s assets, income, and liabilities, calculate a debt-to-income ratio, and review credit history. The requirement to verify and confirm these items eliminates the ability to do certain loans 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 can afford the payment under the higher rate. This will help prevent borrowers from getting into trouble when interest rates adjust, resulting in higher payments.
Qualified Mortgage Rule
The Qualified Mortgage Rule (QM) establishes a new category of loans that must meet specific 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 specific upfront points and fees that a lender may charge are limited to 2.25% of the loan amount.
Many borrowers have expressed concern about the 43% debt-to-income ratio limit and fear it will make getting a loan more difficult. However, there was an exception until January 2021 for loans 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, others feel that these rules may cause lenders to loosen up credit standards, as there is no specific guidance for them to follow and use to defend their underwriting decisions. Nevertheless, the CFPB estimates that approximately 95% of the loans currently being originated would still qualify under the new guidelines.
We specialize in conventional home mortgages, FHA, VA, and USDA mortgage options, refinance loans, and reverse mortgages. In addition, we’ve worked extensively with cash-out refinancing and help clients to lower their monthly mortgage payments.
Updated on January 11, 2023