Recently, new mortgage rules have come into effect in hopes to put an end to the worst mortgage lending abuses of the past. Unlike previous mortgage rules, these rules take a “back to the basics” approach to lending which will provide less risk of defaults and foreclosures among borrowers. Mortgage brokers now have to follow two new requirements: The Ability to Repay Rule and the Qualified Mortgages Rule.
The first requirement states that, based on the borrowers debt to income ratio, the borrowers has to be able to afford their monthly payments. Lenders will also be required to document and verify the borrower’s income, assets, credit history and debt. Basically, this will result in more paperwork and a longer processing time. Underwriters also can only approve mortgages based on the maximum monthly charge that a borrower can face instead of the low rates that are often advertised to attract new mortgage contracts.
The second requirement has to do with qualified mortgages. The new industry standard is that a borrower’s debt to income ratio must be below 43%. Some exceptions can still be made, but the mortgage industry is trying to make sure they don’t over lend again. These qualified mortgages also cannot include features that can be deemed risky. Some of these include mortgages longer than 30 years and income only payments. Lastly, charges and upfront fees cannot add up to more than 3% of the mortgage balance.
Overall, mortgage lenders do not seem too raddled by these new rules. This is mostly because certain anticipated aspects of mortgages were not included in these new rules. For instance, no minimum payment or credit score has been set for borrowers. Although there are new restrictions, the lack of adding a minimum down payment or credit score still allots space for first time home buyers and more.