The new mortgage rules that went into effect on January 10th could hurt lower income buyers going forward.
Under the Dodd-Frank Act that was passed in 2010, lenders are now going to have to have to make a “reasonable, good faith determination” that a borrower can repay the loan before the loan is written. This sounds like common sense, but it does place a new responsibility on lenders, and that will always make it harder for those on the lower income end of the earning curve to borrow.
The real hassle will be the new levels of documentation that will be requested by the banks and mortgage companies. The risk of potential penalties from the Consumer Financial Protection Bureau, a new bureaucracy that will monitor lending practices, means that lenders will focus only on qualified mortgages going forward.
The Qualified Mortgage must meet these requirements:
- A Qualified Mortgage is a loan a borrower should be able to repay. Beginning on January 10, 2014, lenders making virtually any residential mortgage loan will have to assess a borrower’s ability to repay the loan. A Qualified Mortgage is presumed to meet
this requirement. A Qualified Mortgage is a loan that avoids risky features and meets other requirements. In general, the borrower also must have a total monthly debt-to-income ratio including mortgage payments of 43% or less.
- A Qualified Mortgage is safer and easier to understand. QMs can’t have risky features like negative amortization or interest-only payments
- A Qualified Mortgage should be a fairer deal. The new rules limit the points and fees lenders can charge when they want to make a qualified mortgage. This requirement responds to the the extremely high points and fees some borrowers paid during the
mortgage crisis. A loan over $100,000 can’t be a QM if it has points and fees that are more than 3% of the loan amount.
With the added risk and expense of writing new mortgages, many lenders are going to avoid the riskier new buyer market, something we do not need right now for the resale housing industry.