How will the new mortgage rules affect you? If you’re applying for a loan, whether it’s a primary loan to buy property or to refinance, the new mortgage rules matter to you. The new mortgage rules went into effect on January 10th. Basically they say that lenders have to make sure borrowers can afford to repay the loan before they make the loan. Leading up to the Great Recession, it was common for lenders to make loans without verifying the borrower’s ability to repay the loan. It’s hard to believe that a person earning $55,000 was qualifying for a $500,000 mortgage. There is no universe in which that is affordable.
The Consumer Financial Protection Bureau issued the new mortgages rules and lenders are being asked to comply with two new requirements: The Ability to Repay Rule and Qualified Mortgages. These new mortgage rules require mortgage lenders to look at a borrower’s financial information to make sure they can repay the loan before the lender makes the loan. The lender will also explain the repayment process in a way that is much easier for a borrower to understand.
Ability to Repay
With the Ability to Repay rule, lenders must determine whether or not a borrower can really afford the loan. The borrower will have to give them financial information and the lender will have to verify that information. There are eight types of information that lenders generally must consider.
- Income or assets
- Current employment status
- Credit history
- What is the monthly payment amount for the mortgage?
- What is your monthly payment amount on all the other mortgage loans you get at the same time you get this loan?
- What are your monthly payments from mortgage-related expenses, such as property taxes?
- Other debts, such as car loans, school loans, credit card debts, etc.
- Debt-to-income ratio. Adding up all of your monthly obligations.
“Qualified mortgages” have to meet the Ability to Repay rule. They have a cap on how much of your income can go towards your debt, which is generally 43 percent.
To be considered “qualified,” a mortgage:
- Cannot have risky features, such as interest-only payments or negative amortization (which allows the principal to increase over time even though you are making payments)
- Cannot be longer than 30 years
- Cannot have, in most cases, a balloon payment at the end of the loan
- Cannot have excessive upfront costs. Qualified mortgages of more than $100,000 cannot charge points and fees of more than 3 percent of the loan amount.
The new mortgage rules went into effect to protect you and your property value as much as they went into effect to protect the people who truly can’t afford to buy homes. The hope is that you will be protected, lenders will be protected and future borrowers will be protected with the new mortgage rules.
Glinkonomics is Ilyce Glink’s take on what’s going on in the economy this week.
WSB Radio’s Ilyce Glink Show – January 12, 2014
For more information on the new mortgage rules, click the audio link below to listen to the full Ilyce Glink Show on WSB Radio, or go to iTunes and download the show to your handheld device.
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