What does it mean for most new home buyers or those looking to refinance?
Most of the new regulations applied to mortgage lending will take effect on January 10, 2014. For consumers, loan applications taken on or after this date will be subject to the new rules. These new rules and regulations have been adopted by the Consumer Financial Protection Bureau (“CFPB”) and implement changes in the laws that govern mortgage lending, specifically Regulation Z and Regulation X, as mandated by the Dodd-Frank Act. (Officially, Amendments to the 2013 Mortgage Rules under the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z)
As we approach January 10th, 2014, consumers may begin to see and hear a great deal in particular about the Ability-To-Repay/Qualified Mortgage rule in the media. New terms and acronyms such as “Ability to Repay”(ATR), “Qualified Mortgage”(QM), “Qualified Mortgage Rule”(QMR), “43% maximum debt-to-income ratio (DTI)”and many more may raise eyebrows, and a few questions, by those applying for a mortgage loan.
The #1 question anyone thinking about buying a home and obtaining a mortgage, or refinancing a current mortgage, is very likely to be: How does this impact me and do I need to be concerned?
The short answer is that for most borrowers the answer is likely to be “No, you do not need to be overly concerned”. The great majority of loans done by lenders, including Axia Home Loans, in the last few years already fits into the requirements of the new Qualified Mortgage rule. Additionally, Axia is taking steps to implement policies and procedures that will allow us to comply with all of the new rules and regulations with minimal impact to most borrowers, and to continue to offer loan programs that meet the borrowing needs of our customers.
It may help to understand the big picture and why new laws, regulations and rules are being put into place. The decline of the housing market can be traced back to late 2006 and early 2007. The subsequent “housing crisis”and “mortgage meltdown”that ensued caused both Federal and State Governments and Agencies to take action. Legislation was passed and new laws enacted that have changed the way that Banks, Credit Unions, Mortgage Brokers and Mortgage Bankers do business.
All of the additional oversight, laws, rules and regulations ultimately have the same goal;that of ensuring a sound and stable housing market through responsible lending practices. The Ability-To-Repay and Qualified Mortgage rules that will go into effect on January 10th, 2014 are just another step in that direction.
What is a Qualified Mortgage and why is it so important? All loans that fall under the definition of a Qualified Mortgage offer lenders the greatest protection against liability claims in connection with the Ability to Repay rule. It is therefore expected that starting in January 2014, Lenders will only be offering Qualified Mortgage (QM) loans. These QM loans carry restrictions on what can be charged in closing costs as well as how much debt a consumer can carry in relation to their income. QM loans basically have a 43% maximum debt-to-income (DTI) ratio, although loans with a conforming loan limit purchased by Fannie Mae or Freddie Mac, or government insured/guaranteed loans through FHA, VA, or USDAhave been granted a temporary exception to the debt-to-income limit for up to seven years.
Note: “Debt-to-Income”(DTI) ratio is the percentage of a borrower’s total debt (Proposed total mortgage payment + all other applicable monthly debt) in relationship to the borrower’s total gross monthly income.
Which borrowers are more likely to be impacted by the new Qualified Mortgage rule?Those borrowers who have a “debt-to-income”(DTI) ratio of greater than 43% AND are applying for a non-conforming loan or “Jumbo”loanare most likely to be impacted by the new rule.While mortgage loans will still be available for those borrowers needing a mortgage loan greater than $417K, they may find qualifying requirements to be less flexible and a more stringent set of rules applied than exist prior to January 10th, 2014.
While the new rules and regulations address more than just one area that defines responsible lending practices, the one area that is likely to receive the most attention from the media, real estate industry professionals and consumers, will be the implementation of the maximum debt-to-income ratio of 43%.
It’s important to note that many borrowers who apply for a Conforming (aka, “Conventional/Fannie Mae/Freddie Mac”) or FHA, VA or USDA loan and whose debt-to-income ratio is greater than 43% but less than 50%, still fall under the temporary expansion of the Qualified Mortgage definition. Approving a mortgage loan for these borrowers in most cases continues to represent “sound and responsible”lending practices. A borrower’s debt-to-income ratio is only one of several factors that go into the overall “risk layering”analysis that determines whether or not a borrower’s loan application is approved.
Additional information can be obtained by visiting the CFPB’s website at: www.consumerfinance.gov
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