Buying a home is the single largest purchase most people make in their lifetime. Because the price of most homes exceeds the cash savings of most people, consumers look to mortgage lenders to help them make the dream of buying a home a reality. In the past, it was easier to qualify for a mortgage. Consumers often bought homes with little or no down payment, and with little proof they could afford to repay the loan. There are some changes with the announcement of the new mortgage rules for 2014.
Because of the mortgage meltdown in 2008, the federal government passed the Frank-Dodd Act of 2010. The Act includes the Qualified Mortgage rule to protect consumers from mortgage loans they cannot afford to repay. The rule becomes effective on January 10, 2014, and places many rigorous lending standards on banks and mortgage brokers to avoid predatory lending practices. Similarly, the same rule substantially increases the requirements for the consumer to qualify for a mortgage loan.
The Consumer Financial Protection Bureau, the new federal agency created because of the Frank-Dodd Act of 2010, has the responsibility of overseeing mortgage-lending practices under the new guidelines. Under the new rules, lenders must be able to verify several financial criteria before deciding if a consumer can repay a loan. For example, consumers will provide lenders with proof of income and current employment status. The consumer will also need to provide a list of assets, a recent credit report, credit scores and evidence other debts. Consumers will have grounds for a lawsuit if the lender underwrites a loan without verifying the borrower’s financial information.
The new mortgage rules call for lenders to update their loan customers regularly and to provide them with current information about their loan balances. Lenders will provide help to consumers to address and fix problems that often occur during loan repayment. Lenders will not be able to begin foreclosure proceedings against a borrower for at least 120 days after the borrower’s last payment. The added time could help prevent unnecessary foreclosure actions, benefiting both consumers and lenders.
The new mortgage rules, however, will provide lenders with a measure of protection from possible consumer lawsuits. Because the new rules look at the consumer’s ability to repay a mortgage loan, lenders must verify a consumer’s debt-to-income ratio before approving a loan. The new mortgage rules limit a consumer’s debt-to-income ratio to 43% of monthly income. The debt ratio includes credit card and other debts before considering a mortgage payment.
Consumers will need to provide lenders with documented evidence of employment history and status and monthly income. For the growing number of self-employed people, the new rules present a challenge. Many independent workers will be unable to qualify for mortgage loans in several states where W-2 forms will serve as proof of income.
The Federal Housing Administration (FHA) has its own changes to make for the mortgage lending industry in the coming year. The FHA plans to reduce the maximum mortgage loan to $625,500, which is nearly 15% less than the current maximum of $729,750. If consumers want to buy a home with an appraised value within the FHA loan limits, the down payment will remain only 3.5% of the loan. If a home’s value exceeds the FHA maximum, consumers will need to qualify for a jumbo loan through a private lender. Jumbo loans often require a 20% down payment. Depending on the price of homes where the consumer lives, the difference in down payments could discourage mid- to low-income borrowers from buying a home.
The new mortgage rules will change the way consumers qualify for mortgages. The rules also protect consumers from predatory lending practices that led the mortgage meltdown of 2008. Though many consumers still dream of owning a home, only borrowers who can afford a loan will qualify for one. Lenders will also underwrite loans to borrowers who have a better chance of repaying them.