Understanding CFPB’s New Qualified Mortgage Rule

mortgage application, pen, calculator, and model houseBy Keith Loria | RISMEDIA, Sunday, February 23, 2014

In January, the Consumer Financial Protection Bureau’s new qualified mortgage rule went into effect with a goal of helping borrowers understand the true costs of the mortgage they apply for. Also referred to as the ability-to-repay rule, it functions as a way to stop lenders from lending money to borrowers who can’t afford to make those payments over time, thus saving the frustrations and problems that arise when they can’t.

According to the CFPB, its plan is expected to limit the number of foreclosures in the years ahead and eliminate many of the conditions that helped create one of the biggest real estate bubbles in U.S. history.

“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,” reads a statement on the CFPB website. “Certain types of mortgages are more likely to become a debt trap for the borrower, so the new rule lays out basic guidelines that lenders can follow. They give lenders greater certainty that they are meeting the ability-to-repay requirement.”

With the new guidelines in place, there will no longer be no-doc loans, where a loan officer simply writes down figures based on the applicant’s word, without verifying the information. From now on, a lender must assess whether a borrower will be able to repay the loan, not just in the short run, but throughout the term of the mortgage.

To be eligible for a qualified mortgage, one must have a total monthly debt-to-income ratio of no more than 43 percent. That means that when you add up mortgage payments and other debt repayment like credit cards or car loans, the total has to be less than $43 for every $100 in income you earn on a monthly basis.

The loan must also fit into one of three categories: The monthly loan payment plus the borrower’s other debt payments cannot exceed 43 percent of the borrower’s gross monthly income; the loan must qualify to be purchased or guaranteed by a government-sponsored enterprise or be insured or guaranteed by a federal housing agency; or the loan must be made by a smaller lender that keeps the loan in its portfolio and does not resell it.

To be considered a qualified mortgage, a lender may not charge excessive upfront points and fees (capped at three percent of the loan) and the loan cannot be longer than 30 years in length. Additionally, interest-only loans and negative amortization loans may not be considered.

If one was to fall behind on their mortgage, the new rules provide some leverage as servicers will need to wait approximately four months before starting a foreclosure proceeding so there’s ample time to request a loan modification. If a homeowner applies for help, the servicer can’t simultaneously move forward with a foreclosure proceeding, and the homeowner will have the right to assistance from the mortgage servicer to help them with their options.

To learn more about the ability-to-repay rule, contact our office today.

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