You may have heard that there are new rules regarding mortgages starting January 10th 2014. I am not a mortgage lender, but this is obviuosly a topic near and dear to my heart. While I don't know all of the nitty gritty details, I thought it might be helpful to translate what I've learned without using a lot of industry jargon so the average consumer can understand it (which is actually ironic, because the whole point of the new rules is to benefit consumers).
The Consumer Financial Protection Bureau (CFPB) was established in 2010 as part of the Dodd-Frank Act, a financial reform bill passed into law in the wake of the financial crisis. CFPB implemented new rules for mortgages on January 10th, 2014 that apply to all mortgage loans from any/all lending institutions. The new rules are designed to protect consumers and hold lenders responsible for the loans they approve. (Yes, this is actually NEW law!)
As I understand it, the new rules revolve around two concepts...
- Ability to Repay (ATR) – Lenders are required to determine that borrowers have the “ability to repay” loans they are receiving, for certain types of loans. Many of the requirements are already part of the guidelines for the majority of mortgage loans today (e.g. verifying income, employment, debts, credit history, etc.).
- Qualified Mortgages (QM) – The types of loans that must follow/meet the ATR rules will be considered QM. This includes:
- First and second mortgages
- Fixed and adjustable rate mortgages
- Mortgages on primary homes, secondary homes, and investment properties
- Mortgages of 1 – 4 unit dwellings, including condos and co-ops.
Loans that the government considers “risky” CANNOT be considered QM. This includes some of the loan products that were popular before the financial crisis, such as loans that do not require documentation (aka “no doc” loans), loans with negative amortization, and loans with amortization periods longer than 30 years.
There are some real estate-related loans that are NOT subject to the new ATR/QM rules, including:
- Home equity loans
- Time share plans
- Reverse mortgages
- Bridge loans for less than 12 months
- Credit transactions secured by vacant land
So, what has changed? What are the rules?
- There are limits to the points and fees charges to a borrower.
- There are minimum documentation requirements. In addition to verifying income, employment, debts, and credit history they also must look at debt-to-income ratio or DTI. DTI is the amount of existing debt you have, like credit cards, student loans, and any other obligations divided by your total income.
- If closing costs will exceed 3% of the loan amount, then there may be some problems getting the deal done.
Some people are concerned that the new rules will limit consumers’ ability to buy a home or choose a lender. Based on what I’ve read, these concerns are not valid. Most people will not even notice a differencewith the new rules since most of the loans today (post financial crisis) already comply with these rules, and there does not appear to be anything in the rules that would limit your ability to work with the lender of your choice.
There will be more changes from the CFPB over the next 24 months related to Qualified Mortgages(QM) and Ability To Repay (ATR). That means we'll have to keep an eye on new developments.
If you have any questions about the new rules, I suggest you contact a lender. I am NOT a lender, just reporting what I’ve read and heard about, and hopefully providing some clarification. I would, of course, be happy to refer you to a lender if you do not already have someone in mind.
Nancy S. Karp
Thank you for reading!!
If you’d like to understand how this information affects you and your home buying/selling decisions, contact me directly for a consultation.
@properties | Broker, MBA, ePro, SFR, CNE | 607 Central, Highland Park, IL 60093
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