If you’ve been afraid that you won’t be able to qualify for a home loan or refinance because of the new rules that went into effect in January, your fears may be unfounded. While the Consumer Financial Protection Bureau’s (CFPB) controversial “qualified mortgage” rule has made the process more difficult for some borrowers, the effects have been less severe than those many analysts originally predicted.
What’s the Qualified Mortgage Rule?
You may also have heard this rule referred to as the ability to repay rule. Under it, the government will only consider a home loan to be a qualified mortgage if the lender has thoroughly verified the borrower’s ability to repay his or her obligation. A qualified mortgage should be less likely to go into default, and in exchange for extending credit responsibly, the lender receives legal protections from the government.
What’s the Actual Result?
Before the CFPB implemented it, many professionals in the industry predicted the qualified mortgage rule would make it impossible for a large percentage of eligible borrowers to buy or refinance. However, according to anecdotal evidence from loan originators, the impact has been less negative than expected. In fact, an MSN Real Estate article recently quoted one Connecticut loan officer stating, “We do thousands of loans and I would say in the last six months we’ve had only a handful that were impacted.”
High Debt-to-Income is Not a Problem
When qualifying a mortgage, lenders must consider the borrower’s debt-to-income (DTI) ratio. They calculate this by dividing how much you owe each month (in all debts, including the mortgage) by your monthly gross income. A DTI of 43 percent was widely publicized as the maximum DTI allowed for qualified mortgages under the new rule.
However, this is not entirely true. The rule allows small creditors to offer qualified mortgages with DTIs higher than 43 percent. A lender is a small creditor if it had under $2 billion in assets and made no more than 500 mortgages in the previous year. Additionally, the rule does not prohibit large lenders from extending home loans to consumers with DTI greater than 43 percent. While these loans are not qualified mortgages—and don’t come with legal protections for the lender—they are not illegal.
Most Don’t Have Trouble Getting Loans
If you have a stable job for which you receive W-2s, collect paychecks regularly, and need a home loan for an amount within the conforming loan limit (which varies between $417,000 and $625,500 depending on geographic location), the qualified mortgage rule is unlikely to affect your home buying or refinancing experience. If you are self-employed, work on commission or need a jumbo loan, the process may be a little more difficult than it was before implementation of the new rule.
Whether you’ve been dreaming of buying a home or reducing your monthly mortgage payments with a refinance, your real estate professional can help. With experience and dedication on your side, you may find you have nothing to fear from the qualified mortgage rule.
