How will new mortgage rules affect you?
- The mortgage rules are designed to ensure that borrowers can repay.
- Jumbo loans will be harder to qualify for; interest-onlies will be rare.
- Homeowners will get renewed protections when they fall behind on payments.
The home loan industry will soon have to adapt to new mortgage rules that will offer borrowers much needed protection against lender abuses and reckless lending standards. But the changes may not please all borrowers.
Some of the new mortgage rules the Consumer Financial Protection Bureau has issued this year will influence qualification requirements and the types of mortgages that borrowers get. The new standards go into effect next year -- but expect lenders to start adjusting to the new policies in coming months.
The gist of one of the main rules is simple: Lenders will be required to ensure that borrowers have the ability to repay their mortgages. In return, lenders will be protected from borrower lawsuits so long as they issue "safe" mortgages that follow guidelines.
These safe mortgages are what the CFPB calls "qualified mortgages." As defined by the CFPB, only 12.8 percent of new mortgages in 2012 didn't meet the "qualified mortgage" standard, according to real estate data provider CoreLogic.
The new mortgage rules won't affect the majority of people seeking to buy a home or refinance their home loans, because lenders have already tightened their lending standards since the financial crisis.
But certain groups of borrowers will notice a difference, analysts say. This is especially true for borrowers seeking larger mortgages. Self-employed borrowers also may need to jump through additional hoops to get a home loan.
"There are all sorts of ways to prove income, but what's no longer at the table is just asserting that you make X dollars per year," says Julia Gordon, director of housing finance and policy for the Center for American Progress and former manager of single-family policy at the Federal Housing Finance Agency.
What will change for jumbo loans?
Mortgage professionals in high-cost areas say they worry that the new rules may create obstacles for some borrowers seeking large loans to buy or refinance a home. That's partly because a mortgage that falls outside of the conforming and Federal Housing Administration loan limits (which vary between $417,000 and $729,750) will not be considered a qualified mortgage if the borrower's debt payments exceed 43 percent of monthly income.
About 9 percent of jumbo loans issued in 2012 went to borrowers with debt-to-income ratios higher than 43 percent, CoreLogic data show.
"A 45 percent debt ratio seems to be slightly more common than a 43 percent ratio these days, so lenders will most likely reduce their max ratios for nonagency loans," says Matt Hackett, operations manager for Equity Now in New York City.
Interest-only loans will be harder to find
Borrowers who rely on interest-only loans will see changes, because loans that don't require borrowers to pay principal during an initial period are not considered a qualified mortgage under the CFPB's rules.
These loans were widely available during the housing boom and contributed to the crisis, as many homeowners couldn't handle the larger payments once the initial interest-only period expired. Most lenders have stopped offering interest-only loans, but they are still popular for jumbo mortgages and in high-cost areas.