A new era for the mortgage industry has begun. From the ashes of the 2008 financial crisis a host of new rules and regulations have surfaced intended to better safeguard homebuyers and minimize risky loans. Created from the Dodd-Frank Act a new regulatory body was formed called the Consumer Financial Protection Bureau, or CFPB. The CFPB’s number one goal was to create a new class of loans called Qualified Mortgages or QM. This new class of mortgages is all about safety and affordability, two hallmarks of most quality mortgage bankers. QM loans are devoid of riskier features and meet a set of requirements aimed at ensuring the borrower can afford the loan they’re obtaining.
The CFPB laid out a set of eight credit and underwriting requirements that must be met in order for a loan to obtain QM status. These eight requirements are the heart of what’s called the Ability to Repay (ATR) rule. For me personally, these eight requirements have always been woven into the fabric of my mortgage banking career from day one when I started back in 1993.
Ability to Repay Rule, eight financial metrics:
– Current income and assets
– Current employment status
– Credit history
– Affordability of monthly mortgage payment
– Other debts associated with property, such as home equity loan
– All mortgage-related expenses, such as property taxes, HOA’s, etc.
– Current debt obligations, including things like child support or alimony
– Monthly debt to income ratio or residual income
The new rule basically is trying to ensure lenders accurately calculate income and document a file. In my opinion, offices like mine (North Olmsted Loan Production Officer of First Place Bank) will thrive under the new rules. Why? Because of the extensive amount of experience we have and our knowledge of the qualifying process, calculating income, and documenting assets. It surprises me how often I find other lenders who are unfamiliar with reading or understand a personal or business tax returns.
The biggest borrower changes are Maximum Debt to Income (DTI) of 43% and fees cannot exceed three percent of the loan amount with FULL documentation (slightly different with lower loan amounts). When the CFPB stipulates full documentation they mean everything and it’s not a lending requirement, it’s the LAW!
Here is a typical list going forward.
– Most recent 30 day’s pay stubs
– 2 years W-2’s
– 2 years personal federal tax returns, all pages, schedules
– 2 years business tax returns, all pages, schedules
– Possible account prepared YTD profit and loss
– 2 consecutive months bank, investment and retirement statements, all pages
– Other information – all pages of Bankruptcy papers and divorce decree with attachments
I really don’t see this as a big change that will derail our business in 2014, just placing more importance on borrowers selecting the right lender. I do expect to see a lot more deals blow up last minute from many of the industries weak lenders due to their inexperience in accurately calculating income. Because the QM and max DTI of 43 penalties for lenders are so severe, lenders will establish some type of “re-check” of the income a few days prior to the title transfer and in many cases…this is where you’re going to find a lot of possible last minute issues!
There will be more to come on this topic and I will keep you posted.
Liz Schneider and First Place Bank Mortgage Lending is QM ready and looking forward to being a contributing member of a successful 2014!!
For an application or preapproval please visit www.firstplacebank.com/lizschneider