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.