Consumer Financial Protection Bureau (CFPB) recently issued new Qualified Mortgage (QM) Rules to set and standardize underwriting standards. The new regulations are mandated under the Dodd-Frank Act and are expected to put a check on the lending practices that drove the industry to infamous housing bubble in the year 2008. The rules were implemented to the housing market from January, 2014 for protecting the borrowers from loan sharks and misleading lenders. But critics have maintained that the new rules might result in raising the mortgage costs and complicating the documentation, making it tougher for the borrower to get his loan approved. If these critics are to be believed, the new rules will eventually leave a negative impact on the housing market.
Points to Remember
Here are a few points under the new QM rules that you need to know –
- As per the new rules, the lenders need to verify borrower’s repaying ability before lending him out. The borrower is to be assessed in terms of savings, assets, income and current debt. If he chooses to lend anyway, he may be subject to hefty fines, penalties and will no more be entitled to get the legal protection on repayment.
- CFPB has put an upper cap of 43% for borrowers on debt-to-income ratio. So a borrower with a debt-to-income ratio exceeding 43% will not qualify for a mortgage anymore.
- The fees, prepaid interests and closing costs on a mortgage cannot exceed 3% of the loan value. This upper cap of 3% is going to be of immense benefit to the borrowers as it will protect them against loan sharks.
- With an intention to put brakes on no/low documentation loans, CFPB instructs every lender to ask borrowers to present the documents supporting their income, assets and debt. For borrowers, this rule translates to more extensive paperwork and a longer approval time.
- The rules have put brakes on several mortgage features such as a mortgage term can’t be longer than 30 years. Further, these rules put a restriction on interest-only mortgages and negative amortization loans.
- Self-employed borrowers will have to produce not just the tax returns of the past 2 years but also the balance sheet and profit-and-loss statement.
These rules have raised the bar for borrowers to get qualified for a mortgage and at the same time have made the lending process more transparent, saving the borrowers from surprises and debt traps. The borrowers now need to be more proactive when it comes to presenting documents supporting their income and resources. For the lenders, these rules have strengthened the legal protection by standardizing loan approval process.
Considering these points, it may be concluded that the new QM rules are going to favor those who have a strong financial stand but it might make it tougher for sub-prime borrowers to get a decent mortgage.