Whether
you’re refinancing your home loan or planning to buy a home in 2014,
you’ll be among the first consumers to apply for a mortgage under new
rules established by the Consumer Financial Protection Bureau.
Known as “Qualified Mortgages” or QM regulations, these new rules are
meant to protect consumers from unsustainable loans and to prohibit
lenders from approving loans for unqualified borrowers. The rules, part
of the aftermath of the housing and financial crisis, change the
availability of some loan programs and limit the fees that lenders can
charge to consumers.
QM Changes to Mortgage Lending
Several loan programs that the CFPB believes are dangerous to
consumers are not eligible for QM status, including no-documentation
loans, 40-year loans, interest-only loans, loans with a balloon payment,
option loans in which borrowers could pay less than the full amount
due, and loans with negative amortization in which the principal balance
grows because the monthly payments are artificially low.
Borrowers won’t necessarily feel the absence of those loan programs
since lenders stopped offering most of them years ago after the housing
crisis. Also, over the past several years lenders have increased the
level of documentation required of all borrowers to comply with other
regulations and underwriting standards.
Borrowers will be impacted more by two other aspects of QM loans:
Lender fees are limited to 3 percent and have a hard line for your
debt-to-income ratio. The limit on lender fees applies to loans above
$100,000 and will reduce the up-front costs of a mortgage.
Under QM rules, your debt-to-income ratio, which compares your gross
monthly income to the minimum payments on all your debts, must be 43
percent or lower. Some borrowers may no longer qualify for the loan
amount they applied for under these rules and will have to reduce the
amount of the loan or pay off other debt.
Lenders can offer both QM and non-QM loans as long as they verify
that borrowers can repay the mortgage, but the advantage of a QM loan is
that it can be purchased or guaranteed by Fannie Mae and Freddie Mac.
The lender then receives legal protection for QM loans against future
lawsuits from disgruntled borrowers or investors.
Impact of QM
The impact of these rules remains to be seen. Some mortgage experts
are concerned that the stricter rules will keep borrowers who are on the
margins from qualifying because they limit lender flexibility.
In the past, for example, if you had extensive cash reserves in the
bank but were semi-retired with a low or moderate income stream, a
lender might have been willing to approve a loan based on your cash and a
good credit profile. Under QM rules, the debt-to-income ratio limit
must be observed without exception.
Similarly, if you’re stretching your budget to buy a home now but
know you’re in line for a promotion and raise, or about to finish law
school or to pay off a debt with a bonus, lenders in the past might have
approved your loan based on that information and your good credit. QM
rules limit lenders’ ability to approve loans under those circumstances.
In particular, self-employed borrowers are likely to face deeper
scrutiny of their income and their ability to repay a loan.
If you find yourself impacted by the ability-to-repay rule because of
your debt-to-income ratio, you can look for lenders who offer portfolio
loans that they don’t intend to sell to Fannie Mae or Freddie Mac,
because in some cases they’re willing to make an exception and approve a
non-QM loan. On the other hand, if your debts are too high and your
credit isn’t strong enough, it’s better for you and the lender to wait
until you’re better prepared financially to pay for a home.
Good Article!!!
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