Everything You Need to Know About the New Qualified Mortgage Rule

01/22/2014 11:42 AM (CST)

new mortgage rulesOn January 10th, the Consumer Financial Protection Bureau’s (CFPB) new qualified mortgage rule went into effect. The rule is also known as “the ability-to-repay” rule and it was put in effect to keep lenders from lending money to borrowers who can’t afford to make payments. At the same time, the rule is supposed to help borrowers understand the true costs of the mortgage they apply for.

If it works out the way the CFPB has planned, the number of foreclosures is expected to drop in the coming years, and, hopefully, some of the conditions that helped create one of the biggest real estate bubbles in U.S. history will be eliminated.

According to Richard Cordray, the director of CFPB, the new rule represents the government’s “back to basics” approach to mortgage lending. Mainly, no debt traps, no surprises, and no runarounds.

No debt traps

The new rules require lenders to check if a borrower can actually afford to make payments before offering the mortgage. The goals is to prevent future homeowners from being caught in a debt trap and risk losing their home.

No surprises

Mainly, your servicer must keep you informed about your loan. The consumer must also be able to see how their payments are being credited and they should not be caught off-guard when interest rates adjust.

No runarounds

Servicers are required to answer all the questions, keep track of the paperwork, and investigate and fix errors. For homeowners in financial trouble, servicers must disclose all possible work out options that could potentially prevent them from losing their home.

The new rule also eliminates interest-only loans (also known as zero-down payment loans) and no-doc loans, also known as stated-income loans because the loan officer would just write down how much the applicant said he or she earned and not verify that information.

So if you are about to apply for a mortgage, you have to be able to prove that you can afford to repay it in full.

In addition, the loans must fall into one of three categories:

  • The monthly loan payment plus the borrower’s other debt payments cannot exceed 43 percent of the borrower’s gross monthly income;
  • the loan must qualify to be purchased or guaranteed by a government-sponsored enterprise (such as Fannie Mae or Freddie Mac) or to be insured or guaranteed by a federal housing agency;
  • the loan must be made by a smaller lender that keeps the loan in its portfolio and does not resell it.

The (CFPB) is an independent federal agency that holds primary responsibility for regulating consumer protection with regard to financial products and services in the United States.

The CFPB was created in 2011 after its conception was included as part of the Dodd–Frank Wall Street Reform and Consumer Protection Act, which passed as a response to the financial crisis of 2007-2008.

You can watch CFPB director present the new rules in this brief video.