Underwriting is getting back to basics with the “ability-to-repay” rule, adopted last month by the Consumer Financial Protection Bureau and effective January 2014, reports The New York Times. The new rule is being established for the purpose of protecting borrowers from risky lending practices. Kathleen Day, a spokeswoman for the Center for Responsible Lending, says that the rule “sets standards for what’s a safe loan and what isn’t.”
Essentially the rule requires lenders to document the borrower’s job status, income and assets, debt, and credit history. “Qualified mortgages” are those that lenders have issued after complete documentation of the borrower’s ability to pay back the loan. The CFPB also requires the following for a “qualified mortgage,” reports Reuters:
- Mortgage features or fees do not exceed more than 3 percent of the loan amount.
- The borrower’s debt ratio does not exceed 43 percent of their income.
Higher-priced loans or jumbo loans that exceed $417,000 may have more difficulty qualifying for the safe status. This could mean that lenders will respond by tightening their standards for issuing them. For more information on how the new rules will affect you, consult your mortgage advisor.