What the new mortgage rules mean for you
New mortgage lending rules are going into effect Friday that aim to put an end to the worst mortgage lending abuses of the past.
By Les Christie @CNNMoney
The new rules are designed to take a “back to basics” approach to mortgage lending and lower the risk of defaults and foreclosures among borrowers, according to the Consumer Financial Protection Bureau, which issued the new rules.
“No debt traps. No surprises. No runarounds. These are bedrock concepts backed by our new common-sense rules, which take effect today,” said CFPB director Richard Cordray in remarks prepared for a hearing Friday.
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Mortgage lenders are being asked to comply with two new requirements: The Ability to Repay rule and Qualified Mortgages. Here’s how they will impact borrowers:
Ability to Repay
- Lenders must determine that a borrower has the income and assets to afford to make payments throughout the life of the loan. To do so, the lender may look at your debt-to-income ratio, which is how much you owe divided by how much you earn per month, including the highest mortgage payments you would be required to make under the terms of the loan. To calculate your debt-to-income ratio, add up all your monthly obligations — including student loan, credit card and car payments, housing costs, utilities and other recurring expenses — and divide it by your monthly gross income.
- In an effort to put an end to no- or low-doc loans, where lenders issue risky mortgages without the necessary financial information, lenders will be required to document and verify an applicant’s income, assets, credit history and debt. For borrowers, that means more paperwork and longer processing times.
- Underwriters must also approve mortgages based on the maximum monthly charges you face, not just low “teaser rates” that last only a matter of months, or a year or two, before resetting higher.