New Rule Lets Lenders Judge Whether People Can Actually Afford Mortgages
When it comes to placing blame on mortgage lenders, regulators, or consumers for 2008's crippling housing crisis, it's fair to say each played a role.
Yes,
In the end, the
They're calling it the "Ability-to-Pay" rule.
“When consumers sit down at the closing table, they shouldn’t be set up to fail with
Here's what the new rule entails:
The end of quick sale loans. In the past, lenders could get away with offering quickie low- or no-doc loans (they required few financial documents, if any, from the borrower and then could sell off the risky loans to investors). With the new rule, lenders must do a proper financial background. That means sizing up borrowers' employment status; income and assets; current debt obligations; credit history; monthly payments on the mortgage; monthly payments on any other mortgages on the same property; and monthly payments for mortgage-related obligations.
Risky borrowers will have a harder time securing a loan. The lender must prove the borrower has "sufficient assets" to pay back the loan eventually. According to the CFPB, that's determined by calculating debt-to-income ratio (total monthly debt divided by monthly income).
No more "teaser rates" to suck borrowers in. Lenders love to roll out juicy low introductory rates on mortgages to lure borrowers in, but under the new rule, they must calculate a borrower's ability to repay his loan based on the true mortgage rate –– including both the principal and the interest over the long-term life of the loan.
The agency will likely make exceptions for nonprofit lenders who work specifically with low- and middle-income borrowers.
SEE ALSO: This MBA student is learning how to flip a home the hard way >
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