The Consumer Financial Protection Bureau(CFPB) announced new mortgage lending rules this morning that will go into effect one year from now (January 2014). These rules aim to protect borrowers from themselves and lenders from litigation.
We saw in the housing boom that led up to the Great Recession borrowers who had a pulse were able to get a loan. Well, maybe it wasn’t quite that bad but it was close. As long as their credit was decent borrowers could get a loan without having to prove how much income they had. In some cases they didn’t even have to provide bank statements or tax returns (no doc loans). Loans like that are no where to be found anymore but the purpose of these new regulations from the CFPB is to make sure they don’t come back.
The new regulations, also known as the Ability-to-Repay rule or the Qualified Mortgage rule, will require that lenders verify and inspect borrowers’ financial records for proof that a borrower can afford the mortgage payment. In most cases the principal, interest, taxes and insurance will not be allowed to exceed 43 percent of the borrower’s income. Loans with balloon payments (where the balance is due after five or seven years) will no longer be available to most borrowers. The length of time a borrower has to repay a mortgage sill be capped at 30 years and you can kiss interest only loans goodbye.
There is a general sense of agreement in the financial community that the new regulations are good for borrowers and banks. One article in Forbes even argues that they will be good for the housing market by easing the “overly tight” lending environment. Banks are breathing a sigh of relief because by following the new criteria, many feel they will have a better chance of shielding themselves from lawsuits from consumers whose loans go bad.
Don’t let these new rules scare you into rushing out to buy a house before you are ready. One lender quoted on the local Bend news suggests that it might actually be a little easier to get a loan under the Ability-to-Pay rules. The thinking is that lenders have become so strict after “The Fall” that their current lending guidelines are more stringent than the new rules.