On Jan. 10, new mortgage-lending rules drawn up and overseen by the Consumer Financial Protection Bureau (CFPB) went into effect. These rules were mandated under the 2010 Dodd-Frank Act in response to the risky lending practices that led to the housing bubble burst in 2008 and the resulting financial crisis. While these rules are designed to keep borrowers from getting into mortgage loans they can’t afford, they may affect a buyer’s ability to qualify for a loan and limit the type of loan they can get.

Ability to Repay

The ability-to-repay rule requires lenders to make sure you can actually afford your loan payments throughout the life of the loan by looking at your debt-to-income ratio. You will be required to provide more paperwork to verify your income, assets, credit history and debt. And underwriters must approve your mortgage based on the maximum monthly charges owed.

Qualified Mortgages (QM)

The guidelines for QM include:

• QM loans cannot contain any risky features, such as terms over 30 years, negative amortization, interest-only payments or balloon payments at the end of the loan.
• Points and fees (including title insurance and origination fees) on loans over $100,000 cannot be more than 3% of the loan amount.
• Your monthly debt-to-income ratio, including mortgage payments, must be 43% or less. This new rule won’t allow for any compensating circumstances, like large down payments or significant cash reserves to offset a higher debt-to-income ratio.

Steering Restrictions

Loan officers or mortgage brokers cannot be paid more for “steering” you into a higher-cost loan. Also, if you pay a fee to a loan officer or mortgage broker, they can’t be paid by the lender for the same transaction.

Down Payment or Credit Score Requirements

The rules do not stipulate any credit score or minimum down payment requirements. By not including a down payment requirement, these rules don’t restrict first-time home buyers who may have difficulty raising a set down payment, such as 10% or 20%.

While there are no credit score requirements, most lenders likely will not approve applicants with scores under 620.

What This May Mean to You

These new rules may make it more difficult for some people, such as those who are self-employed or those whom tips, bonuses, commissions, rents or investments make up a large part of their total income, to obtain a loan since it may be harder for these individuals to validate their incomes.

In general, you should anticipate that you’ll need to produce more documentation when obtaining a loan. This includes tax records, pay stubs, bank and investment account information.

If you have credit problems and can’t meet the 43% or less debt-to-income ratio, you likely won’t be able to buy the home you want.

Additionally, until lenders have systems in place to handle the new documentation requirements, these new rules may mean it’ll take longer for home loans to get approved.

However, for most borrowers, these changes shouldn’t impact your ability to obtain a mortgage.

If you’re looking for a new mortgage and have questions about the new mortgage rules, contact the senior mortgage specialists at Grandview Lending. We can help you determine if you’ll qualify for a mortgage and walk you through the documentation process. Contact us today.

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