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Real Estate

New rules underline borrower's ability to repay loan

The Consumer Financial Protection Bureau unveiled new mortgage rules that are expected to change how homebuyers go about getting approved for a home loan.

The rules eliminate "no-doc" and "low-doc" mortgages, requiring lenders to make certain that borrowers are able to repay the amount of the loan they seek.

Loans that meet the agency's new lending criteria now will be called a "qualified mortgage." Every company that issues mortgages will be required to follow the new guidelines in order to receive protection from lawsuits filed by troubled borrowers or buyers of mortgage-backed bonds.

Some types of loans will be excluded from these rules, such as interest-only mortgages and loans on which the principal balance rises over time.

A "qualified mortgage" will consist of the following:

  • Lenders must prove that income and assets are sufficient to repay the loan (this applies to jumbo loans as well).
  • Borrowers must be able to document their jobs.
  • Credit scores will have to meet a minimum standard.
  • Borrowers will have to be able to show that they can also still afford other debts associated with the home, such as home equity loans as well as property taxes.
  • Lenders will consider borrower's other debts before issuing a mortgage, such as student loans, car loans, and credit card debt.
  • Monthly payments must be affordable to the borrower.

Homebuyers who fail to qualify for a "qualified mortgage" can still get a mortgage, but mortgage payments must not be more than 43 percent of the borrower's pre-tax income.

Also, the CFPB plans to make some borrowers exempt from the new rules, such as applicants looking to refinance out of subprime adjustable-rate mortgages or some mortgages issued by non-profits that target low-income homebuyers.

The new rules will take effect January. 21. Lenders have a year to fully implement these rules.

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