The 'qualified mortgage' rules have already come into effect. The sub-prime mortgage crisis that the country faced in 2007-08, has been the main reason behind the formation of new mortgage rules. In order to eliminate the chance of future housing meltdowns, policy makers and the legislators have pro-actively designed the new 'qualified mortgage' rules. The aim is to keep a lid on the origination of high-risk and potentially deadly mortgage loans. In fact, shortly after the catastrophic debacle of the Lehman Brothers, many lenders have started to tighten the mortgage lending standards. But, from now onwards, lenders will be encouraged by the law to be more vigilant and restrictive related to lending standards. From now onwards, if a lender issues a non-qualified mortgage that does not conform to qualified mortgage rules, then that lender won't be protected by the government against the lawsuit filed by the homeowners that they were not properly screened. This will provoke the mortgage lenders to abide by the new mortgage rules. Here we discuss about the impact of these new rules on home owners -
1. Debt payments to be less than 43% of income
As per the new rules, your monthly expenses including credit card and other loan bills, taxes, child support, alimony etc should not exceed 43% of your monthly gross income. Considering the high costs of living, many lenders were issuing loans to the borrowers with debt ratio as high as 48%. But, now this possibility has reduced significantly. The Consumer Financial Protection Bureau (CFPB) is of the opinion that the new rules will safeguard the homeowners by guaranteeing that the lenders use a set of underwriting standards that take into consideration the affordability factor very seriously.
2. Freelancers and self-employed have to furnish documents
Often times, self-employed persons and the borrowers were able to obtain a mortgage loan on the basis of their gross income – a figure that is higher than the figure that they show in filing tax returns. Under the new ability to repay norms, freelancers and self-employed borrowers will find it nearly impossible to obtain a mortgage without furnishing proper documents. Under the new provision, these borrowers have to furnish tax returns of past 2 years, bank statements, plus anything else that the lender may ask for to evaluate credit-worthiness.
3. Interest-only loans to exit
In the new lending environment, interest-only mortgages will retreat. Interest-only mortgages offer the borrowers the opportunity to pay only the interest for an initial period of time. Once that initial period is over, borrowers have to pay both the principal and the interest. As per the CFPB's new mortgage rules, interest-only mortgage is not considered as a qualified mortgage. Interest-only mortgages burgeoned during the housing market boom phase and many experts are of the opinion that the proliferation of this type of mortgage was one of the reasons behind the housing crisis. It is expected that in the new qualified mortgage rules era, lenders won't offer these mortgages.
The new mortgage rules seem to be very sensible. These rules are likely to safeguard the market as a whole, at least in the near future.