Safer Mortgages: Ability to Pay Rule

Real Estate
on January 15, 2013

Not everyone could qualify for a mortgage, so lenders began to relax their requirements. They began offering those who couldn’t obtain an ordinary mortgage loan what has been called the “sub-prime mortgage.” With the sub-prime mortgage, many lenders offered those who could not meet the income requirements to qualify for a regular mortgage a chance to purchase a house with reasonable interest rates. However, many of these rates were set to adjust higher after about five years. When this time came, people began to default on their loans.

Predatory lending practices were blamed in large part for the reason that people obtained these sub-prime loans. Some people claimed not to understand what they were signing when they agreed to take these loans. The announcement the federal government made on January 10 explained how a future sub-prime mortgage crisis would be prevented. Simply put, the federal government has new rules in place that will keep lenders from offering loans to people who cannot afford to repay them.

The Ability-to-Pay Rule

The Consumer Financial Protection Bureau (CFPB) wrote the principle described above into the Ability-to-Pay Rule. This rule states that lenders will only offer mortgage loans to people who can actually afford to repay them. According to this rule, lenders must not offer a loan to an applicant without first asking for financial information, such as their income. Once received, the lenders will be required to verify the information the applicant has give them.

Lenders will not be able to approve someone for a loan if the applicant does not earn enough money to make the monthly payments. In the past, lenders only took the introductory lower interest rate into consideration when determining whether or not an applicant could repay a loan. With the new rule, they will need to consider the entire term before they can qualify someone for a loan.

The Qualified Mortgage

As lenders follow the guidelines the CFPB outlined in the Ability-to-Pay Rule, they will be protecting themselves against lawsuits as well as keeping their customers from accepting a loan that they cannot afford to pay back. The CFPB calls these loans “qualified mortgages.” To be a qualified mortgage, the lenders would have followed the guidelines listed above as well as the following:

• Borrowers will meet a minimum credit score to qualify for a mortgage

• Lenders will set monthly payments that the borrowers can afford

• Lenders will take the borrowers’ other house-related obligations into consideration, such as a home equity loan

• Borrowers will be able to afford to maintain the house and pay property taxes before qualifying for the loan

• Borrowers’ other debts will be factored into whether or not they can afford the loan

The CFPB set January 21 as the first day when lenders will need to start qualifying applicants under the Ability-to-Pay Rule. However, they will have a full year to implement the new rules in their entirety. By spring of this year, the CFPB will have proposed a list of lenders that will remain exempt from these guidelines.

Found in: Real Estate
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