New mortgage rules lie ahead and the world is buzzing with alarming claims that the new guidelines will make it harder to get a mortgage after New Year's Day.
Here's an easy bet: Not much will change.
It is true that beginning in January lenders will need to comply with new federal mortgage rules related to Wall Street Reform legislation passed in 2010. That was three years ago; lenders surely know what's coming and most already follow the new guidelines. In fact, a study by ComplianceEase shows that roughly 80 percent of the mortgages now being made already qualify for "safe harbor" status under the Dodd-Frank Act.
So what's the big deal? There are some rule changes coming in January but you can be sure that no financial earthquakes are expected. For instance, on January 10th the new ability-to-repay rule will kick in.
Ability to Repay Rule
And what is it that makes this rule so formidable?
Well, actually, nothing. Under the new rules lenders must verify eight baseline underwriting factors.
1. What are the borrower's current or reasonably expected income and assets?
2. What is the borrower's current employment status?
3. What is the monthly payment that the borrower will face if the loan is granted?
4. Does the borrower face any other payment for a simultaneous loan such as a second mortgage?
5. What is the total monthly payment for mortgage-related obligations such as mortgage principal, mortgage interest, property taxes and property insurance?
6. What other monthly debt obligations does the borrower face? Think of such things as car loans, student debt, and credit cards.
7. How much of the borrower's monthly (before tax) income is devoted to the repayment of debt? Generally, the debt-to-income ratio cannot exceed 43 percent.
8. What is the borrower's credit history? What is the borrower's credit score?
If you've gotten a loan during the past few years you know that the questions above are all standard and normal lender inquiries. There's nothing tricky or complicated about them, no cause for alarm.
Qualified Mortgage Rule
Another guideline set to begin in January defines what is called the qualified mortgage. Lenders do not have to make qualified mortgages but most will because such loans have two big-time advantages:
First, qualified mortgages will be the easiest to sell to investors.
Second, it will be virtually impossible for borrowers who end up in foreclosure to sue lenders who make qualified mortgages, an issue which has become very important because in the past few years major lenders have paid out more than $100 billion in settlement costs and legal bills to resolve allegations that they sold faulty loan products.
Borrowers will very much like qualified mortgages. Under the new rules, qualified mortgages will include all FHA and VA loans, financing that requires little or nothing down. Conventional (non-government) loans and portfolio loans (loans which lenders keep on their own books and don't sell to investors) can also be defined as qualified mortgages if they meet certain criteria such as fees and points which do not exceed three percent of the loan amount and interest rates which are not more than 1.5 percent above the Average Prime Offered Rate or APOR.
In all, the new rules should reduce borrower costs while at the same time making the mortgage marketplace less risky.