New federal mortgage rules that went into effect in January will create new wrinkles for some people seeking a new mortgage, either for a purchase or refinance. After the financial crisis of 2008, Congress created the Consumer Financial Protection Bureau and charged it with enacting regulations to avoid a repeat of the housing crash.
Under the new CFPB rules, the government has defined a “qualified mortgage” standard for the first time. A qualified mortgage must not include features the CFPB considers risky, such as interest-only or balloon payments. Also, a qualified mortgage can be issued only when certain universal “ability to repay” standards are met.
These and other new rules are meant to protect consumers from the predatory lending practices that contributed to the housing crisis. When a bank issues a qualified mortgage, that loan receives a governmental stamp of approval: the borrower cannot successfully sue the bank on grounds that the loan never should have been made. That’s a good protection against unscrupulous lenders encouraging people to take loans beyond their means.
However, the new rules also mean some borrowers who would have previously qualified for a mortgage may not be able to obtain a qualified mortgage now. In particular, a sharp focus on the debt-to-income ratio may trip up some people—even those with substantial assets. A qualified mortgage cannot be issued if total monthly debt payments are more than 43 percent of current monthly income.
While 43 percent seems high, some people have atypical circumstances that may keep them from qualifying. However, borrowers who don’t quite fit the universal profile anticipated by the new rules shouldn’t be disheartened. Just be aware you may need to shop around a bit more.
For most borrowers the debt-to-income focus will be a non-issue, though everyone can benefit by attending to other factors such as credit score, employment status, and assets available for down payments and expenses.
Chad Horkan is manager of the Brookfield mortgage lending office of Wisconsin Bank & Trust.
