New Mortgage Rule Effective January 10, 2014
If you’re in the market for a new home then you should be aware of a new mortgage rule, The Ability to Repay Rule, which takes effect January 10, 2014. The Consumer Financial Protection Bureau amended Regulation Z, a regulation that requires creditors to make a reasonable, good faith determination of a consumer’s ability to repay any consumer credit transaction secured by a dwelling. This means that consumers in the market were able to be granted loans, even if they weren't able to afford them.
When you apply for a loan you may assume that the lender will not make you a loan that you cannot afford. Unfortunately, this hasn't been the case. Years down the road homebuyers have been finding themselves unable to pay the loans back, resulting in foreclosure of their home. The Ability to Repay Rule requires that before lenders make a mortgage loan, they look at a consumer’s financial information to be sure that they can afford to repay the loan. This requires that borrowers' financial information, employment status, income, assets and debt, be supplied and verified by lenders, thereby eliminating no- or low-doc loans. That information, including debt-to-income ratio, must be used to prove that the borrower has the ability to pay back a loan.
So what do this mean to you if you’re in the market for a new home?
- A lender must collect and verify your financial information including your current income or assets, current employment status, credit history, monthly payment for the mortgage and on other mortgage loans you get at the same time, property taxes and other debts.
- You must have enough assets or income to pay back the mortgage.
- A lender can no longer determine your ability to repay using “teaser” rates.
- The rule includes exceptions for refinancing a consumer out of a risky loan.
The rule protects home buyers from potential shady lenders, making sure that homebuyers get a mortgage loan that they can afford. The rule will also help make sure that responsible lenders aren’t forced to compete with reckless lenders that are engaged in risky practices.