13 Jan Major Mortgage Overhaul now in effect
So now that we’ve gotten past the worst housing market in most of our lifetimes, the Consumer Financial Protection Bureau is taking steps to make sure this never happens again (until new rules are put back in place allowing it to happen again). We all saw the news reports about outrageous loan options being offered to the most unqualified people with no real repercussions. Well it’s time to cut out all those crazy mortgage schemes. A new Major Mortgage Overhaul now in effect. Here are some of the main points of the reform:
- No more short, short term rates where the interest rate jumps up after 2 months.
- No more loans where the principal increases shortly after the start of the loan.
- The practice of offering a mortgage officer more money to steer clients into loans with higher interest rates or fees is now eliminated.
- No doc loans, low doc loans are gone. Lenders must make a deeper attempt to verify that borrowers are capable of paying back any loan they choose.
The new rules create 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.
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.
What is the benefit to mortgage lenders in all of this? By working to create qualified mortgages, they will be further protected against unhappy borrowers looking to sue if they go into default.
Now the big questions is – how will lenders adapt to these changes? Some feel that lenders will tighten loan conditions so much that it will be more difficult to get financing and will lessen the number of potential buyers that can take the housing market further out of recovery. Lenders I have spoken with directly have varying concerns.
The bigger players in Cincinnati like 53 Bank, PNC, etc – will only be writing Qualified Mortgages. So if you’re working with one of these big dogs and you don’t qualify, they will ask you to come back in 6 months after you’ve fixed yourself up to their standards. But if you’re working with one of the many different brokers who are able to shop a multitude of different mortgage providers, there is a chance that you will simply be moved to another loan option with a lender who provides NON-qualified mortgages – which will still exist out there.
Most of you aren’t looking to buy anything anytime soon but there are new protections in place for people with existing mortgages:
- If your mortgage is automatically deducted, you will now start receiving statements showing you how you are doing.
- If you have an adjustable mortgage, you will get ample notice about your rate changing so that you can shop around for a better option.
- Mortgage payments must be credited to your mortgage the day they receive it – big change.
And in case you’re currently behind on your mortgage or plan to be in the near future, there are even more protections for you:
- Lender has to reach out a homeowner within 36 days to find out the reason for non payment.
- A lender cannot foreclose on you when they are in the process of working through your default options
So if you are looking to buy but feel you may not qualify for a “Qualified Mortgage”, you’ll still have options as long as you find the right people. As your Cincinnati Real Estate Agent, I can help you with that.
And if you are an existing mortgage holders about to hit some changes, I can help point you in the right direction as well. Though these changes are big, they truly designed to benefit the consumer more than anyone else. Don’t hesitate to reach out with any questions or for any advice.