Part 1 of 2. (here’s part 2)
Qualified Mortgages and the FUD associated with them are very much in the (real estate) news right now – they’re new, they’re as of yet unknown and they’re going to have an impact on the residential real estate market. As many readers know, I’m an advocate of seeking experts and borrowing and sharing their knowledge and expertise. Matt Hodges with Presidential Mortgage is one of those experts (and one of the lenders I recommend to clients).
Qualified Mortgages…what? Yes, the Consumer Finance Protection Bureau (CFPB) issued their final report in December, 2013 entitled “Ability-to-Repay and Qualified Mortgage Rule”.
These regulations officially go into effect on January 10, 2014.
Is this much ado about nothing or drastic changes to the mortgage industry? Let’s examine. Specifically, Home Equity Lines of Credit (HELOC), Reverse Mortgages, land loans, construction loans and most bridge loans are excluded. We are primarily describing changes to first lien, “forward” mortgages on homes.
The Ability-to-Repay (ATR) section includes eight features, most of which we have been complying with for years:
- Income and/or assets needed to qualify will continue. Lenders must not count on verbal income assertions from clients… we must verify that income is real and will continue.
- Current employment has been verified.
- Monthly mortgage payment is used to qualify. An additional change is that certain Adjustable Rate Mortgages must be qualified at a higher than start rate, versus the “teaser” initial rate. Initial interest only periods must be ignored, and borrowers must be qualified, as if the mortgage was amortized.
- Monthly payment for any simultaneous loan/line is calculated in debts – i.e. HELOCs. These are often used in conjunction with a first loan in order to avoid mortgage insurance or non-conforming/jumbo loans.
- Inclusion of taxes, insurance and home owner’s association fees, if applicable must be included in the debt load.
- Debts, alimony and child support should be calculated.
- Debt to income (DTI) and/or residual income must be calculated. We’ll come back to this one – it’s important. ATR does NOT state a maximum DTI.
- Credit history. Wow, that’s a shocker!
Lenders may and have instituted residual income calculations for conventional loans, like Wells Fargo. From a common sense perspective, this is reasonable. VA loans (except Interest Rate Reduction Refinance Loans- IRRRL) include that calculation, to insure that those debts not found on a credit report are included. Those include child care costs, maintenance and utilities on the home and deductions from gross pay.
What if a loan goes into default? If the lender can prove they followed the eight steps and something occurred like an unexpected layoff of the borrower’s employment, then the lender has a “safe harbor”, safe from liability or a “rebuttable presumption.” I’m no lawyer, so I won’t delve further.
Part 2, coming Monday, will cover Qualified Residential Mortgages themselves.