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Mortgage Reforms Protect Homebuyers And Lenders

The aim is to keep lenders from issuing loans to borrowers who cannot afford to pay them off.

“When consumers sit down at the closing table, they shouldn’t be set up to fail with mortgages they can’t afford,” said Richard Cordray, director of the Consumer Financial Protection Bureau.

The rules are meant to avoid the kind of mortgage mess that spawned the financial crisis and ultimately led to the Great Recession.

During the housing bubble, many lenders had lax underwriting standards. Banks often didn’t check documentation, didn’t require minimum credit scores and didn’t determine whether borrowers had enough income to keep up payments.

Now, when a loan meets new lending criteria outlined by the CFPB, it becomes a “qualified mortgage,” which will give protection to  banks from lawsuits filed by aggrieved borrowers or buyers of mortgage-backed bonds.

“It’s a set of standards that protects consumers from bad loans, but it also protects lenders from lawsuits,” said Davis Stevens, CEO of the Mortgage Bankers Association. “Lenders are not protected if they go outside the guidelines.”

The new rules will eventually change the process homebuyers go through in obtaining mortgages. Here’s what you need to know.

Which lenders do the rules cover? All companies that give out mortgages will be governed by the new rules — big national banks, savings and loans, community banks and credit unions.

“The rules will encompass most of the market as it exists today,” said William Emerson, president of QuickenLoans.

How is a “qualified mortgage” defined? The rules spell out what is called a qualified mortgage. To judge whether a loan is qualified, lenders must consider these factors:

  • Income and assets must be sufficient to repay the loan
  • Borrowers must document their jobs
  • Credit scores must meet minimum standards
  • Monthly payments must be affordable
  • Borrowers must be able to afford other debts associated with the property such as home equity loans
  • Borrowers must be able to afford all home-related expenses such as property taxes
  • Lenders must consider a borrower’s other obligations like student loans, car loans and credit cards

What if a borrower does not meet all those guidelines? A homebuyer could still get a mortgage, but only if the mortgage payments don’t exceed 43% of the borrower’s pre-tax income…

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