Many people are unaware of the coming changes in the mortgage world. The Consumer Financial Protection Bureau has drafted new regulations that change the definition of a qualified mortgage. This new standard will apply to all mortgage applications received on and after January 10. The Consumer Financial Protection Bureau was formed by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The CFPB was established to protect consumers by writing rules and carrying out federal consumer financial laws.
The CFPB considers qualified mortgages as loans that meet certain standards designed to ensure that it is highly likely that the borrower will be able to pay the loan back. That is a mouthful isn’t it? These standards for qualified mortgages are changing in 2014. The standards for qualified mortgage will be:
The APR must be within 150 basis points of the annual prime offer rate.
The loan term cannot exceed 30 years.
Points and fees cannot exceed three percent of the loan balance.
There can be not negative amortization.
There can be no interest only payments.
If a mortgage meets these standards, it is considered a safe harbor. A safe harbor loan is one that the lender cannot be sued by the borrower if the borrower is unable to repay the loan. Got that?
All it really means is that mortgage loans must be designed to protect the consumer from borrowing money they will not be able to pay back.
The second part of the regulations is a series of requirements that must be met by the borrower and verified by the lender. These include income and debt levels. There will be more paperwork and more checks and balances.
What is considered a qualified mortgage is a big deal to you, the consumer. Government Sponsored Enterprises (GSE) will not purchase non-qualified mortgages starting next year. That means that lenders will not be able to sell your loan to Fannie Mae, Freddie Mac, or any other GSE if it is not qualified. While some lenders do own the mortgages that they originate, most sell the mortgages to Fannie Mae, Freddie Mac, etc... Who in turn, bundle the mortgages and sell them as securities to investors.
I know this is pretty confusing. What is important to remember is that you want a qualified mortgage in order to get the best rate available. If you are planning on getting a mortgage in 2014, you should do a few things now. Pay down your debt – create better debt ratios to qualify for a larger loan. Start the paper work now – the verification process can be time consuming, confusing and frustrating. Ask many questions – this is a confusing and difficult process, so make sure you get it right. Find a mortgage professional that is an expert and that you trust – they will help you navigate this process.
Good Luck in 2014.
Rick is a realtor, real estate author, and long-time Windham resident. Contact Rick with any of your real estate questions or needs at columnist@TheWindhamEagle.com.