It seems so obvious. You shouldn't qualify for a mortgage unless you can afford it. But in the years leading up to the housing crisis, it was common practice for some lenders to make loans without verifying the borrower's ability to repay. And we all know how that worked out.
New "back to basics" rules from the Consumer Financial Protection Bureau (CFPB) are designed to keep that from happening again by creating a safer and more flexible mortgage market. They cover underwriting and servicing of home loans as well as how struggling homeowners—including those facing foreclosure—must be treated.
Simply put, the goal is no traps, no surprises and no runarounds.
"As we saw in the lead-up to the financial crisis, common sense turned out to be not so common," said the CFPB's director, Richard Cordray, in a recent speech. "By bringing back these basic building blocks of responsible lending and servicing the customer, we will improve conditions for consumers seeking to enter the market and for all those who are still struggling to pay down their existing loans."
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But do the new rules go too far? Will they make it harder to get a home loan?
"Access to credit was already tight coming into the rule changes and this is going to make it just that much tougher, at least in the near term," said Pete Mills, senior vice president for residential policy at the Mortgage Bankers Association.
A new type of mortgage
The new rule creates a new class of home loans called "qualified mortgages." The CFPB says QMs are "safer and easier to understand" than many of the loans approved before the financial crisis.
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To be considered "qualified," a mortgage cannot:
- Have risky features, such as interest-only payments or negative amortization (which allows the principal to increase over time even though you are making payments)
- Be longer than 30 years
- Have, in most cases, a balloon payment at the end of the loan
- Have excessive upfront costs. QMs of more than $100,000 cannot charge points and fees of more than 3 percent of the loan amount
To be approved for a qualified mortgage, the lender must make a good-faith effort to verify that you can repay the loan based on your documented income, assets and debts. In general, borrowers must have a monthly debt-to-income ratio—including mortgage payments and other large debts like car loans—of 43 percent or less.