If you are considering buying a home next year, there are a few things you might want to consider now that the government has issued new mortgage lending rules.
The rules, introduced by the Consumer Financial Protection Bureau on Thursday, essentially protect borrowers from many of the abusive lending practices that were rampant before the housing crisis, such as high upfront fees and interest-only payments.
Some elements of the rules are still under discussion, but here is a basic outline of what to expect when the rules take effect Jan. 10, 2014:
Paying up: Banks and other lenders now have to make sure you have the ability to repay your mortgage before signing the papers. Until now there has not been a law on the books.
Regulators say lenders must consider at least eight criteria, including a borrower’s credit history, debt obligations, employment status, income, and assets. You have to supply documents detailing this information, and banks have to verify it all. The consumer bureau, however, has not told lenders exactly how to evaluate whether a borrower has the ability to pay.
Bait and switch: In the go-go days of the housing market, many home buyers were sucked into loans they couldn’t afford because of low initial teaser rates. No more. Lenders can no longer base borrowers’ repayment ability on teaser rates.
Money in the bank: The rules create a new category of loans called ‘‘qualified mortgages,’’ which offer lenders certain legal protections as long as they adhere to the criteria laid out by regulators. There is no minimum down payment or credit score requirement attached to these new loans, which are more a function of ensuring that lenders are steering clear of risky mortgage features.
Toxic features: To get the qualified mortgage stamp of approval, a lender cannot make loans with features that fueled the housing meltdown: balloon payments, terms longer than 30 years, or structures where the principal balance increases, commonly known as negative amortizing loans.
Sky-high fees: Most qualified mortgages will have a 3 percent cap on the amount of fees and origination expenses that lenders can charge.
Debt burden: Under the new loan category, a borrower’s total debt burden cannot exceed 43 percent of their income. Debt in this instance includes student loans, auto loans, revolving debt, alimony, child support, and existing mortgages.