U.S. Government issues new rules for home mortgages

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A federal government agency has issued new rules for home mortgages that will rewrite the way that banks decide who gets a home loan. If you’re thinking about buying a new home, you’ll want to know about these rules, so you’ll know what to expect when you apply for a mortgage and what you can do to increase your chances of getting the loan you want.

The rules officially take effect next January, but many lenders will begin following them as soon as possible.

For a long time, banks have been worried about being sued by homeowners if they make a loan that the homeowner can’t reasonably be expected to pay off. The new rules say that banks can no longer be sued in this way if they make loans that follow certain requirements. These loans are called “qualified” mortgages.

While it’s possible that some lenders will continue to issue “unqualified” mortgages, this will be the exception rather than the rule, because lenders will be facing potential legal liability if they do so. It’s expected that most lenders will try to issue only qualified mortgages.

So, what is a qualified mortgage, and how do you qualify to get one?

The most basic new rule is that a mortgage is “qualified” only if your total debt payments – including not just the mortgage, but also car loans, educational loans, etc. – are no more than 43% of your pre-tax income.

In addition, lenders are required to carefully scrutinize your employment status, income, and credit history to verify that you’ll be likely to be able to repay the loan.

That’s a pretty strict rule. To put it in perspective, of all the mortgage loans that were issued in the U.S. in 2011, only about three-quarters would have been “qualified” under these rules.

However, because today’s real estate market is still in recovery mode, the Consumer Financial Protection Bureau – the agency that issued the rules – is providing a temporary alternative.

That is, even if you don’t qualify under the 43% test, you might still qualify if you would pass an automated mortgage-granting test used by Fannie Mae, Freddie Mac, or the Federal Housing Administration. It appears that most of the mortgages issued in 2011 that didn’t pass the 43% test (but by no means all of them) would still have qualified under one of the automated tests.

This alternative won’t be around for long; it lasts only until the government’s conservatorship of Fannie and Freddie ends, or in seven years, whichever comes first.

Also, the alternative test can’t be used if you apply for a so-called “jumbo” mortgage. These are mortgages that are larger than the government’s loan ceilings, which are $417,000 in most of the country (but can be as high as $729,750 in certain high-cost markets).

Here are some other important provisions of the new rules:

    • There’s no minimum down payment and no minimum credit score, as long as you meet one of the two tests. (Many people were afraid that the rules would require a high down payment to qualify.)

 

    • In deciding whether you meet the 43% test, you can’t use a “teaser” rate or low introductory adjustable rate. Instead, you must meet the 43% test based on the highest rate that will apply during the first five years of the loan. For this reason, it’s expected that adjustable-rate mortgages will become more uncommon, and banks will focus much more heavily on traditional 30-year fixed-rate loans.

 

    • Certain types of loans, such as those that allow interest-only payments and those in which the principal can increase over time, can’t be “qualified” regardless of whether you meet the 43% test.

 

  • Loan-origination fees will be capped at 3% of the loan amount, although there may be some exceptions for loans under $100,000.