US News – Susan Johnston
As the housing market heats up again following the slowdown of the past few years, many consumers will try to buy a home for the first time or upgrade a home with a mortgage that had previously been underwater. If you fall into either camp, you should know that a new set of rules passed as part of the Dodd-Frank Act – enacted in response to the financial crisis of the late 2000s – will go into effect Jan. 10, 2014. The rules will require lenders of qualified mortgages to conduct more thorough analyses of mortgage applicants’ financial information to ensure applicants can afford to repay the loan.
According to the Consumer Financial Protection Bureau, under the Ability-to-Repay rule, the lender generally must consider eight factors. These include your current income or assets, current employment status, credit history, the monthly payment for the mortgage (based on the highest interest rate if it’s an adjustable rate mortgage, not an introductory teaser rate) and your monthly debt payments (including the mortgage) compared to your monthly pre-tax income, which is your debt-to-income ratio.
Under the new rules, you’ll generally need a debt-to-income ratio of less than 43 percent to obtain a qualified mortgage that’s underwritten based on standards considered safe for consumers. Federal rules state that the term of the loan cannot exceed 30 years, and the points and fees paid by the borrower cannot exceed 3 percent of the total loan amount (not including bona fide points or discount points used to pay down the rate of the loan). Under the new rules, qualified mortgages also cannot have risky features such as an interest-only period, when the borrower pays only interest without paying down the principal.