You may have heard that at the beginning of 2014, the Federal Housing Administration (FHA)–according to the terms of the Dodd-Frank Wall Street Reform & Consumer Protection Act–made a lot of changes to the way mortgage lenders can lend money and to whom. So if you’re in the market for a loan this year, heads up; there are some things you need to know.
These new rules and standards, called the Ability-to-Repay & Qualified Mortgage Rules, are part of an effort to prevent this country from being plunged into a mortgage crisis like the one we saw in the late 2000s.
A look back.
Part of what got us into trouble over the last decade or so was that mortgage lenders were, not to put too fine a point on it, extending loans to people who had no ability to repay them. These loans were often based on stated income alone (which is exactly what it sounds like; a person could say, “I make XX dollars a year” and not really have to show any documentation showing that was true). Lenders justified these loans by saying they were made on the assumption that home values would continue to rise and that borrowers could rely on the equity in their homes if they needed to refinance, and so on and so forth. No bueno, as they say.
Times have changed.
By now, we all know the story of the mortgage crisis. Far too many people took out loans that they couldn’t afford and those same people found themselves in a position where they couldn’t make their payments; they found themselves going through foreclosures or making a strategic default–a situation in which a borrower, knowing they just can’t pay, simply walks away from their mortgage. It did all but irreparable damage to our financial system, nearly crippled the housing & real estate industries, and it’s why the Dodd-Frank Act was passed. It’s something we never need or want to have happen again.
Enter the Qualified Mortgage & Ability To Repay Rules.
So, what IS a Qualified Mortgage? Really, it’s just what it sounds like. Effective January 2014, mortgage lenders must now prove that a borrower has the ability to repay a loan. Lenders must now hold borrowers to much higher standards than before. If they don’t, lenders can now be on the hook for loans they make. If those loans default, the FHA will go after THEM, so you can bet they’re going to be a lot pickier and a lot more careful about who they’re giving loans to.
What does this mean for you?
To be a “qualified mortgage”, a borrower’s debt-to-income ratio (DTI) can’t be higher than 43%. What this means is that the amount of debt you have can’t be more than 43% of your gross (before tax) income. Also, the fees that lenders can charge–origination fees, points, and the like–can’t be more than 3% of the total value of the loan (fees that are charged for things like running your credit report generally aren’t included in this amount).
Qualified mortgages can’t have:
- An “interest-only” period, when you pay only the interest without paying down the principal
- “Negative amortization,” when the loan principal increases over time, even though you are making payments
- “Balloon payments,” which are larger-than-usual payments at the end of the loan term—though these are allowed in some limited circumstances
- Loan terms that are longer than 30 years
These changes are important to how loans are made now and how you (as well as lenders) will be protected. More regulation might make it seem like getting a mortgage is now harder, but these measures have been put into place to protect you from taking out a loan whose payments you can’t handle. While all of this might sound like a lot of hassle, know that the FHA & CFPB have put these rules in place to protect YOU. You don’t want to be put in the position where you have a loan you can’t afford anymore than lenders want to give you one.
If you have questions or would like more details about Qualified Mortgages and the Ability to Repay Rules, visit http://consumerfinance.gov/regulations or take a look at the video below.