Ability-to-Repay Rules when applying for a mortgage!
When you go to apply for a mortgage, you might struggle to understand just how big a monthly payment you’ll be able afford.
In the years leading up to the financial crisis, lenders too often made mortgages to consumers who were unable pay them back, and as a result, many consumers ended up in delinquency and foreclosure. You should not assume that lenders or mortgage brokers won’t approve you for a loan you cannot afford.
But there are some precautions that have been put in place to help. The Dodd-Frank Wall Street Reform and Consumer Protection Act requires lenders to take more into consideration when approving mortgage loans.
New criteria to determine ability-to-repay for mortgages
The Bureau’s Ability-to-Repay rule requires lenders to look at a consumer’s financial information in order to ensure the consumer can afford to repay the loan before making a mortgage loan. To do so the lender must collect and verify your financial information, and generally must consider eight types of information:
- Current income or assets
- Current employment status
- Credit history
- The monthly payment for the mortgage
- Monthly payments on other mortgage loans you get at the same time
- Monthly payments for other mortgage-related expenses (such as property taxes)
- Other debts
- Monthly debt payments, including the mortgage, compared to your monthly income (“debt-to-income ratio”). The lender may also look at how much money you will have left over after paying your debts each month.
This rule applies to most mortgage loans but excludes certain types of loans such as: home equity lines of credit, timeshare plans, reverse mortgages, and temporary loans.
This rule also creates a category of loans called Qualified Mortgages (QM) that have certain, more stable features. Lenders that make QMs are presumed to have already met the Ability-to-Repay requirements.
The Ability-to-Repay/QM rule will help make sure that you get a mortgage loan you can afford and also make sure that responsible lenders aren’t forced to compete with reckless lenders who engage in risky practices.
Simon Resnik Hayes LLP