Mortgage rules have begun to change post January 2014. The new mortgage rules have been introduced in January 2014 by the Consumer Financial Protection Bureau (CFPB) to make home loans safer. Check out the 6 questions you need to ask about the new guidelines and how they affect your financial health.
Q1. Qualified mortgage – Why has it been introduced?
A: CFPB introduced the new mortgage rules with a specific aim, and that is to minimize the risks involved in home loans. The new guidelines aim to involve clear disclosers, better underwriting services and less shocks.
Q2. What is the lender's responsibility as per the new rule?
A: As per the new rules, the lender needs to ascertain borrower's repayment capability – both in the short term and long term. The borrower must be able to make the monthly payment throughout the loan term. This means he should be able to pay both the highest interest rate and lowest rate if such a situation arises in future.
Q3. What is the new debt-to-income ratio for the qualified mortgage?
A: You need to have a monthly debt-to-income ratio of 43% from now onwards. If you calculate your total mortgage expenses, tax payments, credit card bills, etc., then that figure should not be more than 43% of your yearly income.
Q4. Will it be difficult for the borrowers to buy house?
A: No, it won't be difficult to obtain a mortgage under the new rules as long as you meet the loan standards. However, it may be little difficult to meet the minimum requirements. This doesn't imply you won't be able to purchase a house. Rather, the adjustments you make to qualify for mortgage can help you avoid debt problems in future.
Q5. Qualified mortgage – Is it a blessing or a curse?
A: It is a blessing for both the housing market and the borrowers. Read below to know in details.
For the housing market:
It is a blessing for the housing market. The likelihood of mortgage defaults and foreclosures are greatly minimized when borrowers are buying houses they can afford. This actually helps to stabilize the housing market. In the long run, the house prices would not fluctuate as they did during the bubble. Borrowers would be able to purchase houses that they can really afford.
For the borrowers:
It is a blessing for the borrowers due to 2 reasons:
- Restrictions have been imposed on the risky loans - Previously, a lot of borrowers got into debt problems due to risky types of mortgage loans such as interest-only mortgages and negative amortization loans. New restrictions have been imposed on these loans, which in turn will prevent borrowers from entering into a debt trap.
- Low fees and points: According to the new rules, the maximum points and fees that lenders can charge is 3% of the loan amount.
Q6. Will these new rules benefit homeowners in any way?
A: The new rules are going to be extremely beneficial for the homeowners. Lenders have to send monthly statements to the borrowers wherein they would know how their payments have been credited. In case of an adjustable-rate mortgage, your monthly statement needs to disclose when the interest rate is going to change and how much you've to pay to the lender. In addition to that, if you default on your mortgage, then the loan servicer needs to wait for at least 4 months before initiating the foreclosure process. This gives the homebuyers a lot of time to try for mortgage modification.
Conclusion
CFPM has formulated the new mortgage laws under the following principles:
- The borrower must be able to afford the loan
- The loan terms and conditions must be safer for borrowers
- There shouldn't be complex features in the loan
It is not that lenders have to issue loans as per these guidelines only. They can still make loans beyond these guidelines. However, lenders need to ensure that borrowers are able to afford the loans. Moreover, lenders will have less protection against legal ramifications in the event of loan defaults.