There are new mortgage rules that went into effect on January 1st of this year. These new rules are designed to take a “back-to-basics” approach to real estate financing. According to Richard Cordray, director at the Consumer Financial Protection Bureau (an independent federal agency responsible for regulating financial protection for consumers), these common sense rules are intended to offer the consumers “No debt traps. No surprises. No runarounds.”
With the new rule in effect, it means that you will have more information and more protection when you’re shopping for a loan and while you own your home.
In the years prior to the housing crisis, there were some lenders that made loans without checking a borrower’s income, assets, or debts. While these loan products made home ownership possible for many people, it turned out to be a pretty bad idea. Then, when many borrowers couldn’t repay their loans, the economy was hurt badly.
“No debt traps. No surprises. No runarounds.”
The new mortgage rules help change that. They help protect you by requiring your lender to make a “good-faith, reasonable effort” to determine that you are likely to be able to repay your loan. That means the lender will check and verify your income, assets, debts, credit history, and other important financial information. And no more qualifying you based only on those initial “teaser” rates that trapped some consumers.
Under the new requirements, a borrower’s ability to repay must be verified by the lender. Furthermore, loans must meet a qualified-mortgage standard based on several criteria, including:
- The borrower’s debt-to-income ratio cannot exceed 43 percent.
- Fees and points must be limited to no more than 3 percent of the loan (for loans exceeding $100,000).
- The loan cannot have features like as interest-only periods, negative amortization or a loan term greater than 30 years
- Adjustable-rate mortgages have to be underwritten to the highest possible payment in the first five years. Put another way: The borrower can’t get approval strictly based on the ability to afford a low initial payment that’s intended to rise significantly a few years later.
- Lenders are required to comply with two new rules addressing Qualified Mortgages and the consumer’s ability to repay.
More protections
Lenders who meet certain requirements for what we call Qualified Mortgages–or QMs– are presumed to have made that good-faith, reasonable effort to check your ability to repay. QMs have several characteristics that protect consumers. First, QMs can’t have risky features like negative amortization or no-interest periods. Second, QMs are available with some exceptions to borrowers who have a monthly debt-to-income ratio of 43 percent or less, meaning that the total of their monthly mortgage payment, plus other fixed debts like car loans, is not more than 43 percent of their monthly gross income. Most people taking out a mortgage now have a debt-to-income ratio of around 38 percent.
You’ll also have less to worry about when you hire someone to help you find a mortgage. Loan officers and mortgage brokers have to follow rules to protect you from certain conflicts of interest. That means anyone you pay to help you find a mortgage generally can’t also be paid by someone else. The rules also restrict “steering,” or practices that give financial incentives to loan officers or mortgage brokers for pushing people into higher-interest loans that they can’t afford — a practice that was all too common leading up to the housing bust.
“We think the new rules are balanced and well-drawn. They will offer consumer’s protection without limiting credit to qualified borrowers,“ said Gary Kalman, the policy director for the Center for Responsible Lending.
According to the CFPB, the new rule will empower you to get important information about your mortgage. If you have questions about your mortgage or you think your servicer has made a mistake, the servicer is required to respond to your written inquiries quickly. You’ll get a new periodic mortgage statement or coupon book that gives you important information about your monthly payment in one place.
If your financial situation changes and you are having trouble making your mortgage payments, servicers now have to reach out under certain circumstances and send written information describing how you can apply for the options available to avoid foreclosure.
During the housing crisis, mortgage servicers were unwilling or unable to help borrowers in trouble. Now your servicer has to ensure that employees assigned to help you will be able to answer your questions and important documents won’t go missing.
All in all, the goals of the new rules are to insure that consumers face no debt traps, surprises, or runarounds. And create a market where, if you run into trouble paying your mortgage, you’ll have a fair shot at all the options available to help you avoid foreclosure.
