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Nancy Starczyk: Information for buyers

Posted: February 12, 2014 2:00 a.m.
Updated: February 12, 2014 2:00 a.m.

 

Under the federal Ability-to-Repay rules that went into effect Jan. 10, lenders received guidelines on the type of financial information homebuyers must provide lenders when seeking a loan.

The rules are intended to eliminate or sharply reduce the delays, runarounds, and painful shocks that hurt millions of homeowners during and after the financial crisis known as the Great Recession. The hope is that the tighter rules will return housing market to an era of safer mortgages and fewer surprises.

Under the new rules, virtually every mortgage loan a lender makes must now be evaluated based on a borrower’s ability to repay that loan.

That means precisely what it suggests — the borrower should be able to repay the loan for many years, not just during the first few months when an initial “teaser” interest rate may keep the monthly payment low.

The CFPB rules also define a new class of mortgages — called “Qualified Mortgages” — for which borrowers who qualify are presumed to be able to repay. QM’s are designed to be safer and easier to understand than many of the loans consumers got in the lead-up to the financial crisis.

The lender generally must consider eight types of information:

1. Current income or assets.

2. Current employment status.

3. The applicant’s credit history.

4. Monthly payment for the mortgage.

5. Monthly payments for other mortgage loans approved at the same time.

6. Monthly payments for other mortgage-related expenses, such as property taxes.

7. Other debts.

8. Monthly debt payments, including the mortgage, compared to monthly income — “debt-to-income ratio” — or

how much money the borrower will have left over each month after paying debts, called “residual income.”Not surprisingly, lenders are required to determine that borrowers can repay the loan. Toward that end, the lender may look at an applicant’s current income and assets — except the value of the mortgage property itself. The lender also must look at a borrower’s debt-to-income ratio or the amount of money the borrower will have left over each month to pay for essentials … such as, food and heat.

A lender cannot use temporary low payment rates to determine whether a borrower is able to repay the mortgage. For example, if the loan is an adjustable-rate mortgage, the lender will generally have to consider the highest interest rate that the borrower may have to pay. The new rules do, however, include exceptions for refinancing a consumer out of a risky loan. In defined circumstances, the ability-to-repay rule may not apply to a creditor refinancing a borrower from a riskier mortgage, such as an interest-only loan, to a more stable loan, such as a fixed-rate mortgage.

Nancy Starczyk is President of the Santa Clarita Valley Division of the Southland Regional Association of Realtors. David Walker, of Walker Associates, co-authors articles for SRAR. The column represents SRAR’s views and not necessarily those of The Signal. The column contains general information about the real estate market and is not intended to replace advice from your Realtor or other realty related professionals.

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