What Does This Mean to You?
You may have heard about a new rule that may impact people looking to purchase or refinance a home.
What is This Rule?
As of January 10, 2014, lenders are required to more thoroughly assess a borrower’s “ability to repay” a loan, so that he or she can receive a “Qualified Mortgage” (QM).
Why was it Enacted?
The rule is part of the Dodd-Frank Consumer Protection Act, which made banks and mortgage lenders legally liable for determining borrowers’ abilities to repay their mortgages. It was enacted to help ensure borrowers get a home loan they can afford to repay, and to help prevent people from going into foreclosure and losing their homes.
What is the Bottom Line?
While new guidelines are now in effect related to loan limits, a borrower’s debt-to-income ratio, fees and other items, the good news is that the Consumer Financial Protection Bureau (CFPB) estimates that 95 percent of all mortgages made in 2013 already met the new rule. So there’s a good chance the new rule won’t impact the majority of borrowers.
- Elimination of interest only loans
- Elimination of negative amortization loans
- Elimination of stated/no-doc loans
- Elimination of loans with more than a 30 Year Amortization
- Borrowers qualify on fully indexed ARM rate and not the start rate
- Creates a definition for a Qualified Mortgage (QM). These are rules for mortgages for all creditors offering loans on residential real estate
- Also creates QRM for lenders selling loans to the secondary market
- 43% Debt to Income Ratio (currently 45% to 50%)
- Maximum 3% for points and fees for loans above $100k
- Rate less than 1.5% above Average Prime Offer RateMeets Ability to Repay (credit, income, asset and documentation rules outlined in a 148 page document)
- All loans that meet Fannie/Freddie/FHA/VA guidelines will AUTOMATICALLY MEET QM for next 7 years
- If seller does more than 1 seller carry within 12 months then Ability to Repay rules apply
- The loan needs to be fully amortized (no balloon payments permitted)
- Loan needs to be fixed rate for at least 5 years
- Seller must insure that buyer has reasonable Ability to Repay (based on 148 page rule book regarding credit, income & assets)