“New Rule” Could Make Obtaining Mortgage Loans More Complicated for Borrowers

The Qualified Mortgage (QM) Rule is part of implementing the Dodd-Frank Act. Also known as the Ability to Repay (ATR) Rule, it serves as the first ever attempt by the Consumer Financial Protection Bureau (CFPB) to establish a basic standard for qualifying borrowers for mortgage loans. Unfortunately, it will make borrowing money a bit more complicated for homeowners and homebuyers. Don’t worry, though, because Homes.com has highlighted a few details of this new rule so that you can help your clients and prospects overcome this additional obstacle for financing for their next home.

Qualified Mortgages must exclude the following features:

– An “interest-only” period, when you solely pay interest without paying down the principal

– “Negative amortization,” when the loan principal increases over time, despite the fact that you are making payments

– “Balloon payments,” larger-than-usual payments at the end of the loan term (although they are allowed in some limited circumstances)

– Loan terms that exceed 30 years

Qualified Mortgages limit the percentage of your income that can go towards debt:

– Qualified mortgages normally require that monthly debt, including the mortgage, doesn’t exceed 43% of monthly pre-tax income. With that said, there are some lenders who may also decide that debt of more than 43% is suitable.

–  For the time being, Qualified Mortgages are loans that can also be purchased by Fannie Mae or Freddie Mac or insured by certain government agencies, like the Department of Agriculture, even if the debt ratio exceeds 43%. Furthermore, any loans insured or guaranteed by the Department of Housing and Urban Development, including through the Federal Housing Administration (FHA), also qualify under rules issued by that agency.

Mortgages with high upfront points and fees are not Qualified Mortgages

– With Qualified Mortgages, lenders are not permitted to charge homeowners or homebuyers with excessive upfront points and fees, because the cost limits depend on the size of the loan. Third-party charges, such as those associated with running a credit report, are usually not included in the limit. QM’s also have limits on discount points (a percentage of the loan that you pay upfront in return for a reduced interest rate).

These rules have been created to prevent another mortgage meltdown by protecting lenders. Unfortunately, it makes lending policies much more strict. Industry groups have already began to complain because of the risks these new rules impose on the promising real estate recovery.

Following the housing bubble burst, the primary economic focus has been on restricting lending to even the playing field for borrowers. Hopefully, the new Qualified Mortgage rule doesn’t make this more severe. Be sure to inform your clients of these new policies because it could be the difference in whether or not they are able to afford their next home. To find even more mortgage related articles like this, check out Homes.com’s featured author Shashank Shekhar.

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