Financing a home just got more complicated, but borrowers can prepare themselves with some education and guidance.
Effective January 10, 2014, the Consumer Financial Protection Bureau is requesting that lenders follow the new Ability-to-Repay and Qualified Mortgage (QM) rule, which is intended to reduce the chances of a loan default.
Under this rule, the borrower cannot spend more than 43 percent of their income on debt in order to be considered for a mortgage loan, and lenders will need to take the sum of all borrower debt (such as student loans, car payments, credit cards, utilities, housing costs, support payments, etc.) and divide it by the borrower’s monthly gross income. Some lenders may decide to not lend fully to the 43 percent threshold.
The borrower will also need to show their ability to pay monthly payments for the life of the loan (generally 30 years) in order to qualify.
Subcommittee Chair Rep. Shelley Moore Capito, R-W.Va., told Housing Wire (www.housingwire.com) that she is most concerned that lenders will be hesitant to issue mortgages for borrowers who fall outside of the QM rules, particularly those in the “low middle-income” range.
The new rules are designed to take a “back to basics” approach to mortgage lending and lower the risk of defaults and foreclosures among borrowers, according to the Consumer Financial Protection Bureau (CFPB), who issued the new rules.
“No debt traps. No surprises. No runarounds. These are bedrock concepts backed by our new common-sense rules, which take effect today,” said CFPB director Richard Cordray.
The great news to consumers is that upfront fees and charges cannot total more than 3% of the mortgage amount. Over the years, lenders and title companies have raised and added fees to mortgage transactions, making it difficult for borrowers to bring additional monies to the closing table, especially first-time homeowners.
For more information, go to http://files.consumerfinance.gov/f/201301_cfpb_ability-to-repay-summary.pdf
Time will tell if the new Ability-to-Repay and Qualified Mortgage (QM’s) rule protects the borrower without stalling the housing recovery which is tightly hinged to our economic recovery.