By Reva Nelson on RISMedia
As of January 1, 2014 the new Consumer Financial Protection Bureau (CFPB) rules and requirements for buying a home and refinancing a mortgage, also known as the “qualified mortgage” or “ability-to-repay” rules, are in effect. There may be a few challenges ahead for buyers who may not be prepared for the heightened level of financial scrutiny. The good news is that by having a firm handle on the changes, brokers and their agents can stay ahead of the game, guiding their buyers as they navigate the new requirements.
The new rules, designed to discourage the predatory and risky lending that led up to the recent financial and housing crisis, stem from the Dodd-Frank Act of 2010. Among other things, the sweeping legislation established an independent consumber bureau within the Federal Reserve to protect borrowers against abuses in mortgage and other types of lending. Predatory lending practices (in theory) are a thing of the past. The goal is that the new rigor in ensuring homebuyers can afford to repay their mortgages will stabilize the housing market for the long term.
What Brokers Need to Know
For brokers and agents, the new mortgage rules mean that buyers must jump through more hoops than in the past. As such, the new ability-to-repay guidelines require more documentation for both borrower and lender. And the new qualified mortgage (QM) guidelines, if adhered to, mean that both the lender and borrower are protected in the event of a loan default.
In a nutshell, for buyers, these guidelines mean:
- No more interest-only, negative amortization, balloon payment loans, or prepayment penalties, since these are risky products.
- Upfront points and fees must not exceed 3% of the total loan amount.
- Debt-to-income ratio may not exceed 43%.
- For brokers and agents, this means helping buyers understand that to qualify for a QM, they may have to stick within a specific price range unless they can put down a bigger down payment or find a co-signer.
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