New Mortgage Rules Change Game for Borrowers and Banks

In an effort to stabilize the mortgage market after the housing crisis, lending has become a constantly evolving practice, where old rules are thrown out and new ones – often aimed at protecting the consumer – are put in, such as the rules recently enacted by the Consumer Financial Protection Bureau.

According to the CFPB website, these new rules have a goal of “safer mortgages with fewer surprises.” To get there, the CFPB developed Qualified Mortgages, a new type of mortgage that has standardized terms and a stricter qualification process.

Qualified Mortgage Rules

As of Jan. 10, a mortgage must meet certain qualifications to be considered a qualified mortgage, or QM. According to the CFPB, to be considered qualified a mortgage must have:

§  Lower upfront costs. For loans over $100,000, points and fees cannot exceed 3 percent of the total loan. However, loans under $100,000 can have higher fees.

§  Safer features. QMs cannot have hard-to-understand features such as interest-only payments or negative amortization, which can hurt the consumer.

§  Shorter loan terms. The loan term for a QM cannot exceed 30 years.

§  Set payments. Typically, mortgages with balloon payments at the end do not qualify as a QM.

These new rules will add a level of standardization to the mortgage process, which CFPB hope will make mortgages easier to understand and manage on a consumer level.

Loan Approvals

While qualified mortgages offer advantages to consumers, the approval process is also tougher. Before the housing crisis, some lenders were known to approve mortgages without verifying the borrower’s income and ability to pay. Now, “QMs will generally require that the borrower’s monthly debt, including the mortgage, isn’t more than 43 percent of the borrower’s monthly pre-tax income,” according to the CFPB.

Your lender must assess your finances to determine if your income-to-debt ratio qualifies for a QM. That means tougher background checks into your income, bank accounts and debts.

Exceptions and Marketplace Concerns

Not all mortgages are “qualified.” Under the new rules, lenders can choose to issue their own mortgages and some will still continue to offer mortgages under their own terms. However, the lender must still verify that your debts do not exceed 43 percent of your monthly pre-tax income. Before opting for a non-qualified mortgage, make sure you fully understand the terms and fees associated.

Smaller lenders and credit unions are worried the new rules will be difficult to comply with and will make it harder for them to approve mortgages to potential home buyers. At a recent House Financial Services subcommittee meeting, Jack Hartings, president and CEO of The Peoples Bank Company in Coldwater, OH, said his bank would no longer be able to offer certain loans once made to new customers, adversely affecting the bank’s business and its community’s access to credit. Daniel Weickenand, CEO of Orion Credit Union told the committee that 10 percent of the credit union’s loans issued in the past now qualify as non-QM and are no longer offered, negatively effecting future customers who could have benefited from those loans.

Some smaller lenders also told the Wall Street Journal that they may not have the manpower to ensure their mortgages meet the new regulations.

All of which means you may have fewer options when shopping for a mortgage in the coming months.