What’s the Qualified Mortgage Rule and how will it affect you?
The Qualified Mortgage Rule was formed by the Consumer Financial Protection Bureau (CFPB) to satisfy the “ability-to-repay” requirement from the 2010 Dodd-Frank Wall Street Reform and Consumer protection act. Banks have the option to offer privately funded loans outside of these rules, but it could leave them vulnerable to litigation.
Ability to Repay
Over the last five years banks and the lending industry have restricted access to many of the programs that left the economy and housing industry in shambles. The Ability-to-Repay requirements will solidify the rules; to prevent the possibility the flawed policies could return.
- All financial information must be verified including credit history, income, assets, employment, and credit obligations. This prevents “No-Document” loans that permitted un-qualified buyers with unverified assets to purchase homes they couldn’t afford.
- Borrowers must meet minimum and maximum qualifying guidelines to ensure they can repay the loan. This is in direct reference to debt-to income ratios which is calculated dividing monthly debt by monthly gross income.
- Teaser Rates can no longer be used to qualify borrowers. Adjustable rate mortgages will be available but borrowers will be qualified based on the maximum possible rate, not just the introductory rate.
The CFPB created the Qualified Mortgage rules to meet all of the ability-to-repay requirements. The Qualified Mortgage rules will be followed by lenders when a borrower is obtaining FHA, VA, USDA, Freddie Mac, and Fannie Mae home
- No excess upfront lender points and fees.
- No toxic loan features: including interest-only loans, mortgages with negative amortization, balloon payments, loan terms greater than 40 years (balloon payments permitted in approved rural communities)
- Cap debt-to-income ratio of 43% (all debt divided by gross income).
What does all of this mean for me?
It all depends on your situation on whether this will impede your plans. According to the Core Logic only 12.8% of the mortgages in 2012 would have been affected by the Qualified Mortgage rules.
- With limited points and fees expect most lenders to raise minimum loan amounts in order to comply. The limited fees lenders can charge will make loans under $100,000 harder to come by.
- “Toxic Loans” were in fact toxic for some, but helpful for those that understood what the loan entailed and why they needed it. Most of these programs were meant to help self-employed borrowers, investors, and commissioned employees. Fortunately this won’t impact the market much since most of these programs were sent out to pasture years ago.
- Lenders will be providing buyers with pre-qualification letters based on the maximum 43% debt to income ratio which could reduce the amount you qualify for (FHA currently permits DTI’s above 50% with compensating factors, but will be reduced when this takes affect).