New Mortgage Rules: What You Need to Know
By: Chad Gramling
Posted on Tuesday, January 14, 2014
You may have heard that the Consumer Financial Protection Bureau (CFPB) issued new mortgage rules that may sound like it is more difficult to get a home loan. However, these rules are aimed at protecting members and all consumers in general. They’re designed to prevent future housing bubbles in the wake of the Great Recession, thereby strengthening our country’s economy and your bottom line.
If you’re in the market for a home, or want to refinance your current mortgage, educate yourself on the impact that these new rules will have on you as you work through the loan process. Here are some key things to know about New Mortgage Rules:
- Debt-to-Income. One of the biggest changes to mortgage loans is that lenders must prove the borrowing consumer’s ability to repay within a reasonable loan period. Lenders will look at your debt-to-income ratio, or how much you owe (including student loans, credit card payments, vehicle loans, etc.) compared to your monthly income. Generally, this needs to be below 43 percent. To calculate, total up all your monthly payment commitments and divide that by your gross (before tax) monthly income.
- Maximum Loan Terms. Historically, loan terms have typically been 15 or 30 years, but some mortgage brokers offered loans beyond 30 years. New rules state that 30 years is the maximum. This doesn’t impact many consumers, but it does protect them from additional interest accrual for mortgage loans that would be amortized over an extra 10 years or so (in other words, the overall cost of your loan is less).
- Life of Loan Picture. In the past, lenders have found ways to qualify borrowers by using “teaser rates” or special terms that expire shortly after. Once the special terms expire, borrowers often struggled to make payments on the new, usually higher, interest rates or baseline payments. This is because the borrower’s debt-to-income ratio has increased with that teaser being gone. The CFPB’s new rules require mortgage approval over the life of the loan—after any teaser rates expire.
- More Detailed History. No-doc and low-doc loans are a thing of the past, with lenders now required to document and verify the income, assets, credit history, and debts of applicants. While this means more paperwork and a longer process for consumers, you will get a much clearer picture of what you can afford and how your new mortgage payment will impact your bottom line.
- No Broker Incentives. Part of what created the housing bubble and subsequent burst was the practice of mortgage brokers pushing through loans for consumers who really could not afford them—all to earn financial incentives for themselves. These “steering” practices are no longer allowed. Brokers are all tied to the same rules, thus protecting consumers from questionable tactics to get their loan approved.
- Upfront Fees. All mortgage applications come with fees—title insurance, origination fees, underwriting, processing, etc. CFPB’s new rules limit these fees to no more than 3 percent of the mortgage balance, which now makes those upfront fees more reasonable and predictable.
- No More Interest-Only. Interest-only loans are considered a risky loan feature, causing the principle balance to continually increase even though the loan holder makes regular monthly payments. New rules prohibit these types of loans, or other risky practices, for qualified mortgages.
While these new rules may be difficult to understand and sift through, the 3Rivers team has many knowledgeable and professional mortgage representatives who will work with you to identify your debt-to-income ratio, answer any questions you may have and, of course, find the perfect home loan for you. If you'r ready to get the process started, click here to apply for a mortgage online and we'll be with you every step of the way.