This week the Consumer Financial Protection Bureau released their new guidelines that all lenders will have to follow. The "ability to repay" and "qualified mortgage" rules will go into effect January 2014.
The CFPB states that lenders can no longer offer no-doc or stated income loans. This is something that ended a couple years ago, but now we have a law that says lenders can't do this. This means we have to be able to document your income and assets and your ability to repay the mortgage.
A qualified mortgage means that as long as your mortgage passes certain guidelines, the lender has complied with the QM rule. The basic requirements are:
- no excess upfront points and fees
- no toxic loan features such as interest only loans, negative amortization, no loans with terms greater than 30 years
- cap on your debt to income ratio of 43%
The Ability to Repay rule means that the lender must determine if the borrower has the ability to repay the loan. To do that we must verify the following:
- current income and assets
- current employment status
- credit history
- the proposed monthly mortgage payment and the monthly payment on any simultaneous loans associated with the property such as a HELOC or a second mortgage
- monthly payment of other mortgage related obligations - such as property taxes and insurance
- current debt obligations such as installment loans, child support, credit card payments, alimony
- the monthly debt to income ratios.
Most of these guidelines are things we currently follow. Over the last couple of years, most mortgage companies have stopped doing toxic loans and most are documenting income, assets, etc in more detail than we have over the last few years. The biggest change we will see is the 43% debt to income ratio. However even that will have several exceptions. The CFPB is excluding many loans from this cap. They have said that for a temporary transitional period, loans that do not have a 43% debt to income ratio but meet other government standards will be eligible.
I would expect that many lenders will start having caps on the debt to income ratios of 43%, right now 45% is very common. We see several FHA loans with ratios closer to 50%. If you are concerned about your debt to income and what you can qualify for, you may want to try and buy a home now before these rules take effect.
