When applying for a mortgage, determining how big of a monthly payment you can afford can sometimes be a complicated situation. In the past, this has led to the problems the big banks are now facing with faulty mortgages and pay backs. In order to rectify some of these problems, new laws are going into effect that will better protect the consumer, as well as the lenders, to make sure that the buyers receiving a mortgage are actually qualified for their loan.
Starting today, the Dodd-Frank Wall Street Reform and Consumer Protection Act requires lenders to take more consumer financial information into account when making mortgage loans. The Consumer Financial Protection Bureau’s Ability-to-Repay rule protects buyers by making sure they can afford to repay the loan.
Under the Ability-to-Repay rule, a lender must verify your ability to repay using proper documentation. The proof of the following types of information will be required from buyers for all loans:
- Current income and assets
- Current employment status
- Credit history
- Monthly payment for the mortgage
- Monthly payments on other mortgage loans
- Monthly payments for other home-related expenses (i.e. property taxes and insurance)
- Other debts (i.e. credit cards and student and auto loans)
- Monthly debt payments, including the mortgage, in comparison to your monthly income (debt-to-income ratio) and your remaining funds (residual income)
The Ability-to-Repay rule creates a category of loans that have certain, more stable features. These loans are called Qualified Mortgages (QM). The Ability-to-Repay/QM rule is designed to create safer loans by limiting higher-risk products and features that harmed borrowers during the mortgage crisis.
Last year, almost every loan done at Compass Mortgage would fall under the QM qualifications so our practices are already in place to make sure you get the most sound financing available. If you have any questions about your home affordability, please contact one of our mortgage bankers today.
Interested in making your first home purchase? Our Mortgage 101 Handbook is a great resource for first time homebuyers.