If you haven’t applied for a home loan in the last few years, things may be a little different. The financial crisis and burst housing bubble caused the Consumer Financial Protection Bureau (CFPB) to create new housing rules for borrowers and lenders. These rules won’t necessarily make loan approval more difficult, but knowing what to expect before you shop is a good idea. Here are the basics of the new rules.
Ability to Pay
The new rule is sometimes referred to as the “Ability to Pay.” Mainly, this law forces people to prove they can pay for a new home. Instead of just writing down annual salaries, which was sometimes acceptable before, borrowers have to show a proof of income. For those working regular jobs with a weekly or bi-weekly paycheck, this should be easy. Self-employed borrowers or borrowers whose income relies heavily on tips and bonuses may find this a little more difficult, although not impossible. If you’re thinking of buying a home soon, start collecting pay stubs, salary contracts, and any other paperwork that could prove income.
43%
When you are figuring out your home loan, the new rules dictate that your monthly payment amount can not exceed 43% of your monthly income. For a simple example, if you make $10,000 a month, your home loan payment cannot be more than $4,300. There are a few exceptions to this rule, but not many. Make sure your new home loan payments will stay under that 43%. You may need to pay a larger down payment to get where you need.
30 Years
To avoid risky loans, lenders are not allowed to give out any loans exceeding 30 years. So if you were thinking you could take out a 40-year loan like before, this will no longer work. When you do the math, plan on a 30-year loan.
Interest-Only
Before the financial crisis, some people were paying interest-only loans. These loans allowed buyers to pay only interest for a predetermined amount of time. These are no longer permissible if your lender wants to stay within the Qualified Mortgage guidelines.
Qualified Mortgage
Qualified Mortgage is the other name for this law or the “Ability to Pay” rule. A qualified mortgage or QM is considered a “safe” loan by the CFPB. These loans meet all the above guidelines. QM’s are not required to offer a home loan. Some banks have chosen to keep offering loans that aren’t QM as long as ability to pay is proven. The QM guidelines give lenders more legal rights if the borrowers fail to pay. Most loans since the housing bubble burst have fit within these guidelines, so you should probably plan on a QM loan.
For buyers, this all means that getting a loan is just a little stricter than before. If you are financially secure, you will be fine. These rules are just good to keep in mind and are meant to protect borrowers and lenders from another mortgage crisis like the one we had a few years ago. If your financial situation fits within these guidelines, you should talk to a St. George real estate agent about buying a home.
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