The Consumer Financial Protection Bureau is making big efforts to protect current and future homebuyers from loans that will set them up for failure. By future-proofing mortgages, they hope to prevent another real estate collapse like the one from the mid-2000s that we’re still recovering from.
One of the biggest culprits of the real estate market collapse was that banks only checked if applying borrowers were able to pay the introductory mortgage rate. After a couple of years, the interest rates on these mortgages changed, significantly raising the monthly payment amount, thus making it unaffordable for the homeowner.
The new regulations placed by the CFPB requires lenders to assess the homeowner’s ability to repay the loan at it’s highest point in order for it to be approved as a qualified mortgage. Qualified mortgages are those that can be bought, guaranteed or insured by government agencies, including: Fannie Mae, Freddie Mac, and the Federal Housing Administration. The stricter regulations also need to be thoroughly documented by the lender to prove their due diligence before a potential homebuyer is approved for a loan.
Although, there are exceptions that can be made for qualified mortgages, they generally need to meet the following guidelines:
· The term must be a maximum of 30 years.
· Interest-only, negative amortization and balloon-payment loans are prohibited.
· There are limits as to the points and fees that are charged upfront.
· Borrowers must have a debt-to-income ratio of 43 percent or less.
These regulations will undoubtedly make it more difficult for applicants to be approved for home loans. However, it’s in the best interest of the community as a whole. Lenders were notorious for leading borrowers to believe that they would be able to afford loans later down the road, even if payments increased dramatically. It’s good to see an effort being made to protect the hardworking homeowner.