Big changes are ahead in the mortgage world, particularly for homebuyers who take out “qualified mortgages.” Those home loans are insured by the Federal Housing Administration and are generally extended to consumers who could not otherwise afford a home. (FHA loans helped fill the gap created by the collapse of the subprime mortgage market; as the housing market has recovered, lawmakers have taken steps to protect consumers from unaffordable mortgages while simultaneously reducing strain on the FHA program.)
New rules, which take effect Jan. 10, 2014, prohibit loan terms longer than 30 years, negative amortization and interest-only payments. In addition, fees charged by a lender can be no greater than 3% of the loan balance.
Qualified mortgage lenders must “make a reasonable, good faith determination of a consumer’s ability to repay any consumer credit transaction secured by a dwelling,” according to the Consumer Financial Protection Bureau. A new debt-to-income ratio plays into these qualifying standards. As of Jan. 10, a borrower’s debt load cannot be greater than 43% of their annual income, including most collections accounts and judgments. That’s a lot less than the 55% now allowed under special circumstances.
The changes, part of part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, are designed to protect customers from homes they can’t afford, but the more stringent requirements may present obstacles to some aspiring homeowners.
Long term, mortgages should be be less costly for consumers, and a healthy credit profile is one of the strongest paths toward affordable loans.
Especially with the new debt-to-income ratio coming into play, consumers should try to pay down debts to improve their credit scores. While there will be stricter limitations on home loan costs, better credit scores translate to better mortgage rates, which is why all prospective homeowners should assess their credit profiles before shopping for a home.