Basically, here is the overall CFPB definition that lender will use to determine the borrower’s “Ability to Pay” the Qualified Residential Mortgage that will become effective January 10, 2014:
The lender must collect and verify your financial information. When you apply for a mortgage loan, you will have to give the lender certain financial information. The lender will have to check the information using reliable documents, such as a W-2 or pay stub. The lender generally must consider eight types of information:
- Your current income or assets
- Your current employment status
- Your credit history
- The monthly payment for the mortgage
- Your monthly payments on other mortgage loans you get at the same time
- Your monthly payments for other mortgage related expenses (such as property taxes)
- Your other debts
- Your monthly debt payments, including the mortgage, compared to your monthly
income (“debt-to-income ratio”). The lender may also look at how much money you have
left over each month after paying your debts.
…Oh yes, that’s right – nothing about down payment requirements which if you can’t afford the down payment, it’s a good indication you can’t afford an emergency repair to maintain the home since you can’t save the necessary funds for those expenses!
The CFPB has requested public/private comments on the new Qualified Residential Mortgage (QRM) guidelines. Besides being too long, I’d like to ask how effective will the rules be to (a) prevent the next housing crisis and (b) stimulate new and used home sales to get the economy running again?
In 25 words or less, the CFPB was created by the Dodd-Frank bill to define consumer protections in credit card and other financial aspects in our lives including mortgages. In a Federal Government attempt to solve problems, and after several hearings of what happened during the mortgage meltdown and the $7 Trillion loss of homeowner’s equity, the CFPB has defined the “perfect mortgage parameters” (i.e., Qualified Residential Mortgage) that would get the most protection under the law of any consumer recourse (i.e., courts & regulators assume it was properly underwritten). In other words, if a loan originated satisfied the sign of the CFPB (in effect at the time of origination or retroactive?), then the lender is considered to be protected from litigation of abuse.
Note: Two ways to verify loans are QRMs (1) run the details through automated underwriter software controlled by Fannie, Freddie, or FHA, or (2) poof that borrower can afford to pay loan terms.
With all that said, the new rules are supposed to exclude high risk loans or loans that have negative amortization or interest only among other loans. I also believe that loans issued or held by Fannie, Freddie, and FHA are excluded as well. Rules also include improved disclosures of the proposed mortgage in order for you to understand your costs and shop around and compare loans. It is interesting to note that the new rule DOES NOT require a certain minimum down payment.
5-17-2013: CFPB releases new videos explaining QRM mortgage rules.
5-6-2013: Debt-to-income (DTI) ratio capped at 43% and loan rate can’t exceed 1.5% higher than going rate and other restrictions and conditions…. Source: http://realtytimes.com/rtpages/20130502_qualifiedmtgrule.htm
Related Note: Another Dodd-Frank provision is for those issuing mortgage backed securities (MBS) to hold 5% themselves.