The Consumer Financial Protection Bureau implemented new rules that will take us to a “back to basics” approach for mortgage lending. The CFPB director, Richard Cordray said: “No debt traps. No surprises. No runarounds. These are bedrock concepts backed by our new common sense rules.”
Mortgage lenders will now have to comply with two new requirements: Qualified Mortgages and The Ability to Repay Rule. What does this mean for the consumer?
- To make sure you aren’t taking on more house than you can afford, your debt-to-income ratio generally must be below 43%. This rule is not absolute. Banks can still make loans to people with debt-to-income ratios that are greater than that if other factors, such as a high level of assets, justify the risk.
- Qualified mortgages cannot include risky features, such as terms longer than 30 years, interest-only payments, or minimum payments that don’t keep up with interest so your mortgage balance grows.
- Upfront fees and charges cannot add up to more than 3% of the mortgage balance. That includes title insurance, origination fees and points paid to lower mortgage interest rates.
The Ability to Repay
Lenders must determine that a borrower has the income and assets to afford to make payments throughout the life of the loan. To do so, the lender may look at your debt-to-income ratio, (which is how much you owe divided by how much you earn per month), including the highest mortgage payments you would be required to make under the terms of the loan. To calculate your debt-to-income ratio, add up all your monthly obligations – including student loan, credit card and car payments, housing costs, utilities and other recurring expenses – and divide it by your monthly gross income.
Since 1951, James B. Nutter and Company has followed the rule: “We close loans that are the best for the borrower, not what is best for the company.”
**This new rule will finally regulate “steering” practices of other mortgage originators. Steering is using incentives for pushing unfavorable rates or fees onto the borrower.
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