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Many homebuyers will now face greater scrutiny as they apply for mortgage loans. That’s because new regulations that went into effect in January require lenders to analyze potential borrowers’ ability to repay the mortgages for which they’re applying.
The rules come from the Consumer Financial Protection Bureau (CFPB) and are intended to keep consumers from having mortgages they can’t afford to repay.
If you’re seeking a mortgage loan, you’ll likely hear a new term: “qualified mortgage” or “QM.” Lenders making QMs typically assess a prospective borrower’s ability to repay the loan based on certain attributes, including:
- Reasonably expected income,
- Employment status,
- Other debts,
- Credit history, and
- Monthly debt-to-income ratio, which typically will need to be less than 43%.
To analyze these, a lender might review your W-2 statements, income tax returns, and bank statements, among other documents.
The rules also ban a number of “toxic loan” features from most qualified mortgages, including:
- Interest-only periods in which borrowers pay just the interest and no principal,
- Balloon payments, although these are allowed in certain circumstances,
- Negative amortization, or loans in which the principal increases over time, even as the borrower makes payments, and
- Loan terms extending beyond 30 years.
In addition, lenders likely will be unable to determine a borrower’s ability to repay using a temporarily low “teaser” interest rate. So, if the loan is an adjustable-rate mortgage, the lender will determine your ability to repay using the highest possible interest rate.
The new rules also limit the initial fees and points that can be assessed on most qualified mortgage loans. Some charges — say, to run a credit report — are excluded from the limit.
The new rules come at a bit of a cost: Lenders may find it hard to recoup the expense that the extra scrutiny requires even on smaller mortgage loans, and they may decide not to issue loans that fall below a certain threshold. Self-employed individuals, whose income often fluctuates, might be unable to show they can manage the ongoing payments.
If you’re thinking about purchasing a home, contact us to learn more about how these regulations might affect the mortgage loan you may qualify to take. For additional information, please contact us at 302-225-0600, or click here for email.