The ability to repay a mortgage has always had inherent importance as a factor in the success or otherwise of a mortgage loan application. In January, legislation helped mandate such a requirement.
It is intended to protect borrowers from themselves, and to measure as far as is possible that they are able to repay their agreed mortgage. Adopted by the Consumer Financial Protection Bureau (CFPB), the rule is not only designed to ensure that proper checks are carried out on prospective borrowers, but also to protect them from lending practices that have led to problems in the past.
Here are some of the main points of the new rule.
Verification of Financial Information
In order to establish theer ability to repay a mortgage, lenders must examine documents proving a borrower’s financial status. That includes:
- Employment status
- Existing assets
- Existing debt obligations: credit cards, car loans, other mortgages, etc
- Credit record and history
- Monthly outgoings
- Alimony, etc
Each of these must be documented. This means that ‘no doc’ loans will no longer be allowed. Lenders will not be permitted to offer quick finance without documentation from the borrower. Many past foreclosures were due to lenders failing to identify false financial details from borrowers whose monthly income was too low for the amount of mortgage offered.
Ability to Repay a Mortgage
A mortgage lender must make sure that the borrower has the ability to repay a mortgage before offering it. They should examine the debt to income ratio, and be sure that the monthly repayment can be easily met without hardship. Too many loans have been offered in the past to borrowers who were already overburdened with monthly payments.
Toxic Features Involving Loss of Equity
Loan terms should not exceed 30 years and interest only payments should not be offered. Negative amortization should likewise be stopped. This is the type of loan where the principal increases over time.
These features lead to either static equity at best, or more likely, a loss of equity. The borrower owes more over time than the value of the home. The asset is no longer an asset but a burden: it cannot be sold to cover the amount still owed.
Debt To Income Ratio Caps
In future, mortgages will only be offered where the DTI ratio is less than 43%. It has often been the case that mortgage loans were offered with DTI ratios well above that, which is a strong indication of an inability to consistently maintain repayments. For a limited period, loans will be offered to borrowers with a debt-to-income ratio of more than 43% if they otherwise qualify for a Fannie Mae or Freddie Mac insured mortgage.
Abolition of Excess Closing Fees
Many people who have been offered a mortgage have been hit hard by unexpected closing or upfront fees. There will be a limit placed upon such fees including those paid to brokers and loan officers.
There are several other factors involved in the ability to repay a mortgage that will help to prevent lenders from offering loans to those obviously unable to afford the repayments. This is to benefit both lenders and borrowers, since foreclosures benefit nobody. If you intend purchasing property towards the end of this year, keep the above comments in mind.