The qualified mortgage rule was issued by the Consumer Financial Protection Bureau in January 2013 as part of the Dodd-Frank Reform Act. It applies beginning January 2014 and affects the way lenders must analyze and verify information for customers. A summary of the qualified mortgage rule for PA loans is included in this blog.
Summary Of The Qualified Mortgage Rule For PA Loans
The qualified mortgage rule requires mortgage companies to verify financial paperwork from home buyers and to evaluate their capacity to repay the loan. First and foremost, the earnings and assets must be sufficient to make payments. Secondly, the ability to pay must be considered over the life of the loan and not merely for a preliminary period. This is an especially critical factor for loan programs with variable rates.
Components of the Qualified Mortgage Rule
The qualified mortgage rule details instructions for identifying the ability to repay, debt-to-income ratio limits, and a cap on points and fees charged. Lenders will be required to consider a minimum of 8 different underwriting factors to evaluate the ability to repay a loan. These include:
- Salary and Assets
- Current Employment
- Credit History
- Recurring Mortgage Payments
- Monthly Payments on Other Mortgages
- Other Real Estate Ownership Expenses (Real Estate Taxes, Condo Fees, etc.)
- Other Debts
- Debt-to-Income Percentages
Debt-to-income ratios are limited to forty-three percent. This is actually more than the current forty-one percent maximum ratio. Lastly, points and other charges must not be greater than three percent of the mortgage amount. All of these rules are effective Jan 10., 2014 as part of the qualified mortgage rule.
Mortgage Programs That Will No Longer Be Valid
Due to the components of the new qualified mortgage rule, some loans will not be allowed. These include mortgages requiring no documentation, interest-only mortgages, balloon payments, negative amortization, and those with lengths longer than thirty years. Although these types of mortgages account for a small portion of all loans, it will impact certain types of borrowers such as those wanting jumbo loans.
Reasons for the Qualified Mortgage Rule
The real estate and financial crisis was blamed on common mortgage practices such as issuing loans with risky features or buyers obtaining home loans that were clearly beyond their ability to repay. The new qualified mortgage rule attempts to eliminate harmful loan features. It also minimizes charges by lenders. All of this is intended not only to protect home buyers but also to lower the likelihood of a future crisis. The above summary of the qualified mortgage rule for PA loans is intended only as an overview. To view more details on the qualified mortgage rule, visit the Consumer Financial Protection Bureau website