After a tumultuous few years in the housing market, the rules are starting to change — for the better. Here are seven frequently asked questions about the new “qualified mortgage” rules and answers about how they affect your mortgage:
1. Who created them and why?
These new rules were released in January 2014 by the Consumer Financial Protection Bureau (CFPB). These are guidelines and regulations to make sure that home loans are safer, involve fewer surprises, and provide regulations on how these loans are serviced.
2. What is a qualified mortgage?
A qualified mortgage meets the CFPB standard that a lender must determine whether a borrower will be able to repay the loan — not just in the short run but over the term of the mortgage. Meaning, he or she must be qualified to pay the monthly payment both in its initial rate and at the highest rate that could occur over the life of the loan.
3. How much income will I need to qualify?
Your total monthly debt-to-income ratio will need to be no higher than 43%. That means that when you add up mortgage payments, taxes, insurance, and other debt such as credit cards or car loans, that debt total has to be less than 43% of your monthly income.
4. Are these new rules a benefit to me?
Yes; they are designed to make the loans that are offered safer, with fewer surprises! For example, there are now restrictions on risky types of loans such as negative amortization loans, interest-only mortgages, and artificial upfront teaser-style loans that put so many people into loans that they could afford initially but not when the payments later adjusted higher.
Another benefit is limits on some of the costs involved in getting a mortgage, including points and other fees that lenders often charge. Now the maximum amount can’t exceed 3% of the size of the loan.
5. Will it be harder for me to get a mortgage — and will some homebuyers be eliminated?
If you meet these new qualified loan standards, no, it will not be harder to get a mortgage. But yes, meeting these new standardized minimum requirements may be more challenging. This does not mean you or other buyers are going to be eliminated from homebuying. The adjustments you can make to help qualify for these standards are: reduce some of your debt in advance of purchasing a home, shop for a slightly lower-priced home, or plan for a larger down payment.
6. Is this a good thing for the housing market?
Yes! When you qualify homebuyers and put them into houses they can actually afford, you help stabilize the marketplace with fewer defaults and foreclosures. In the long run, it will help regulate that artificial run-up of home prices that happened in the bubble — and encourage new homebuyers to purchase homes they can safely afford.
7. Once I become a homeowner, how will these new rules benefit me?
Homeowners will now have to receive a monthly statement showing exactly how their payments were credited. If you have an adjustable-rate mortgage, your statement has to tell you in advance when your rate is going to change and to what number. Also, if you fall behind in payments, loan servicers will now have to wait four months before starting a foreclosure proceeding. This will give you time to request a loan modification. Once you have a loan modification, foreclosure assistance, or short-sale help, the loan servicer can’t simultaneously move forward with a foreclosure proceeding — you have the right to assistance from the mortgage servicer to help you with your options!