Qualified Mortgages for Buyers
If you’re in the market for a new home, 2014 may be the right time to buy. In January, new federal lending regulations designed to protect consumers from high-risk, debt-trap loans began.
The regulations create a new category of loan called a “Qualified Mortgage,” which must follow strict guidelines aimed to protect consumers from getting trapped into loans they cannot repay by eliminating high-risk features and products.
Regulations Result of Nationwide Foreclosure Epidemic
In the years prior to the housing bust of 2008, lenders too often made loans available to borrowers who could not pay them back. The nation’s eventual prolonged financial crisis was triggered by an avalanche of delinquency and foreclosures as financial institutions moved to collect on easy-to-obtain loans that were common earlier in the decade. The Consumer Financial Protection Bureau has introduced a new rule designed to eliminate the types of risky mortgages that were common during the housing boom.
Effective Jan. 10, 2014, the Bureau’s Ability-to-Repay Rule was required by Congress as a response to the nationwide foreclosure epidemic. Under the new rule, lenders must evaluate a customer’s income, assets, savings and debt, and weigh those against the monthly payments over the long term – not just a teaser or introductory rate period – to be sure that the consumer can afford to repay the loan.
Setting the Bar for Mortgage Loans
Additionally, reform measures set out basic guidelines for Qualified Mortgages, which give lenders greater certainty that they are meeting the Ability-to-Repay requirement. The rule applies to most mortgage loans, but excludes certain types of loans, such as home equity loans, timeshare plans, reverse mortgages and temporary loans.
To Be a Qualified Mortgage, the Loan:
• Cannot have excessive upfront points and fees
• Cannot be longer than 30 years
• Cannot have certain risky features, such as paying only interest and not principal, or paying less than the full amount of interest so that the total debt grows each month
Additionally, the Loan Must Be in One of Three Categories:
• The monthly loan payment, plus the borrower’s other debt payments, does not exceed 43 percent of the borrower’s monthly income,
• The loan qualified for purchase or guarantee by a government-sponsored enterprise (Fannie Mae or Freddie Mac), or is insured or guaranteed by a federal housing agency, or
• The loan is made by a small lender that keeps the loan in portfolio.
The Bottom Line?
The new regulations aim to prevent consumers from getting trapped in mortgages that they cannot afford. Under the new rule, lenders will have to determine if consumers have the ability to pay back their loans and eliminate reckless actions and high-risk products – in short, follow responsible lending practices.
Consult your lender for details and to learn more about Qualified Mortgages.