New mortgage lending rules are going into effect that aim to put an end to the worst mortgage lending abuses of the past. The new rules are designed to take a "back to basics" approach to mortgage lending and lower the risk of defaults and foreclosures among borrowers, according to the Consumer Financial Protection Bureau, which issued the new rules.
No more debt traps. No more surprises. No more runarounds. These are bedrock concepts backed by new common-sense rules, which take effect immediately. We think the new rules are balanced and well-drawn. They will offer consumers protection without limiting credit to qualified borrowers.
Mortgage lenders are being asked to comply with two new requirements: The Ability to Repay rule and Qualified Mortgages. Here's how they will impact borrowers:
Ability to Repay
- Lenders must determine that a borrower has the income and assets to afford to make payments throughout the life of the loan. To do so, the lender may look at your debt-to-income ratio, which is how much you owe divided by how much you earn per month, including the highest mortgage payments you would be required to make under the terms of the loan.
- To calculate your debt-to-income ratio, add up all your monthly obligations - including student loan, credit card and car payments, housing costs, utilities and other recurring expenses - and divide it by your monthly gross income.
- In an effort to put an end to no-doc or low-doc types of loans, where lenders issue risky mortgages without the necessary financial information, lenders will be required to document and verify an applicant's income, assets, credit history and debt. For borrowers, that means more paperwork and longer processing times.
- Underwriters must also approve mortgages based on the maximum monthly charges you face, not just low teaser rates that last only a matter of months, or a year or two, before resetting higher.
- To make sure you aren't taking on more house than you can afford, your debt-to-income ratio generally must be below 43%. This rule is not absolute. Banks can still make loans to people with debt-to-income ratios that are greater than that if other factors, such as a high level of assets, justify the risk.
- Qualified mortgages cannot include risky features, such as terms longer than 30-years, interest-only payments or minimum payments that don't keep up with interest so your mortgage balance grows.
- Upfront fees and charges cannot add up to more than 3% of the mortgage balance. That includes title insurance, origination fees and points paid to lower mortgage interest rates.
- 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.