Good news for people shopping for a mortgage – and for current homeowners facing foreclosure because they can no longer afford their home loan: New mortgage regulations drafted by the Consumer Financial Protection Bureau recently took effect and they provide a slew of new rights and protections for consumers.
One of the cornerstones of the new mortgage rules is that lenders now are required to evaluate whether borrowers can afford to repay a mortgage over the long term – that is, after the initial teaser rate has expired. Otherwise, the loan won't be considered what's now referred to as a "qualified mortgage."
Qualified mortgages are designed to help protect consumers from the kinds of risky loans that brought the housing market to its knees back in 2008. But obtaining that designation is also important to lenders because it will help protect them from lawsuits by borrowers who later prove unable to pay off their loans.
Under the new ability-to-pay rules, lenders now must assess – and document – multiple components of the borrower's financial state before offering a mortgage, including the borrower's income, savings and other assets, debt, employment status and credit history, as well as other anticipated mortgage-related costs.
Qualified mortgages must meet the following guidelines:
- The term can't be longer than 30 years.
- Interest-only, negative amortization and balloon-payment loans aren't allowed.
- Loans over $100,000 can't have upfront points and fees that exceed 3 percent of the total loan amount.
- If the loan has an adjustable interest rate, the lender must ensure that the borrower qualifies at the fully indexed rate (the highest rate to which it might climb), versus the initial teaser rate.
- Generally, borrowers must have a total monthly debt-to-income ratio of 43 percent or less.
- Loans that are eligible to be bought, guaranteed or insured by government agencies like Fannie Mae, Freddie Mac and the Federal Housing Administration are considered qualified mortgages until at least 2021, even if they don't meet all QM requirements.
Lenders may still issue mortgages that aren't qualified, provided they reasonably believe borrowers can repay – and have documentation to back up that assessment.
New, tougher regulations also apply to mortgage servicers – the companies responsible for collecting payments and managing customer service for the loan owners. For example, they now must:
- Send borrowers clear monthly statements that show how payments are being credited, including a breakdown of payments by principal, interest, fees and escrow.
- Fix mistakes and respond to borrower inquiries promptly.
- Credit payments on the date received.
- Provide early notice to borrowers with adjustable-rate mortgages when their rate is about to change.
- Contact most borrowers by the time they are 36 days late with their payment.
- Inform borrowers who fall behind on mortgage payments of all available alternatives to foreclosure (e.g., payment deferment or loan modification).
With limited exceptions, mortgage servicers now cannot: initiate foreclosures until borrowers are more than 120 days delinquent (allowing time to apply for a loan modification or other alternative); start foreclosure proceedings while also working with a homeowner who has already submitted a complete application for help; or hold a foreclosure sale until all other alternatives have been considered.
For more details on the new mortgage rules, visit www.consumerfinance.gov/mortgage.
Bottom line: You should never enter into a mortgage (or other loan) you can't understand or afford. But it's nice to know that stronger regulations are now in place to help prevent another housing meltdown.
Jason Alderman directs Visa's financial education programs. To participate in a free, online Financial Literacy and Education Summit on April 2, 2014, go to www.practicalmoneyskills.com/summit2014.