As of January 10, there are new mortgage rules being enforced by the Consumer Financial Protection Bureau (CFPB). This is a new government bureau created in 2011 as a result of the Great Recession and real estate mortgage crisis that resulted in millions of foreclosures and short sales. The jurisdiction of the bureau includes banks, credit unions, securities firms, payday lenders, mortgage-servicing operations, foreclosure relief services, debt collectors and other financial companies. Its most pressing concerns are mortgages, credit cards, and student loans.
The CFPB states this is a change to Regulation Z, which implements the Truth in Lending Act (TILA). The intention is prohibiting creditors from making higher priced mortgage loans without regard to the consumer’s ability to repay the loan.
NewQualified Mortgage Rules
The new rules now in affect include:
- Not allowing a borrower’s total debt payments to exceed 43% of his or her monthly income, unless the loan is eligible to be backed by Fannie Mae or Freddie Mac, or a federal housing agency such as the FHA, or is made by a small lender that keeps the loan on its books.
- Limiting upfront points and fees to no more than 3% for loans exceeding $100,000. Loans for less than $100,000 can have points and fees that exceed 3%.
- Although not clearly defined, qualified mortgages cannot have difficult to understand terms. The intent is excluding interest only payments and negative amortization loans.
- To be a qualified mortgage, the length of the loan cannot exceed 30 years.
- Balloon payments at the end of a loan are no longer considered qualified mortgages.
- ‘No documentation’ loans are not qualified mortgages.
What This Means to Consumers
For the average consumer the rules should do little to change their ability to qualify for a loan. What it will mean is that they will need to provide more documentation regarding their income and monthly expenses. The CFPB estimates that 92% of mortgages in the current marketplace meet the QM requirements.
What a qualified mortgage requires that lenders verify:
- Your current income and assets.
- Your current employment status.
- Your Credit history.
- The monthly payment for the mortgage.
- Your monthly payments on other mortgage loans you take out at the same time.
- Your monthly payments for other mortgage related expenses (such as property taxes and insurance).
- Your other debts.
- Your monthly debt payments, including the mortgage, compared to your monthly income (debt to income ratio) or how much money you have left over each month after paying your debts (residual income).
Nonqualified loans can still be made but the lender will be required to keep the loan on their books and not sell it to a third party. Several lenders say they plan to continue making nonqualified loans as long as they meet their internal high standards. It will take some time before it’s known how this will affect the overall real estate market.
As the CFPB website 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.”
However, the real estate lobbyists in Washington D.C. see it differently. They claim self-employed individuals, small business owners, and many others will have a harder time qualifying for loans. They also say that interest rates are likely to rise to cover the added costs for lenders.
Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.