The Dodd-Frank Wall Street Reform and Consumer Protection Act’s latest provision – the Qualified Mortgage rule – is going to effect on January 10, 2014.
While, like many of Dodd-Frank’s other features, its ability to protect customers remains to be seen, one of its impacts is already clear. Taking out a home loan just got harder.
The QM rule contains a set of provisions that, if followed, may protect lenders from lawsuits. They will also make it harder for customers to qualify to borrow money to buy a house.
Verifying Incomes
Lenders now have to follow stringent procedures to verify that borrowers can repay their loans. While many home loan lenders are already verifying and documenting borrower incomes, assets and debts, they will have to create additional paperwork to prove that they did their jobs.
DTI Caps
For a loan to be considered a qualifying mortgage, the borrower’s debt-to-income ratio can be no more than 43 percent. This means that if a borrower has $4,500 in gross monthly income, his total debt payments including his new mortgage cannot exceed $1,935 per month.
Previously, some lenders had been willing to go up to 45 percent.
Fee And Term Caps
Lenders will be less able to make creative loans, as well. Loans that meet the QM rule can be no longer than 30 years in length. They also cannot have closing costs and fees that exceed a cap of 3 percent of the loan’s balance.
Who Gets Impacted?
The good news is that the normal borrower taking out the normal loan might not notice the new QM rule. Borrowers that get squeezed are those that need to take out a loan that doesn’t fit the box laid out by the provisions. These include:
- People in high-cost cities that need 40-year or interest-only mortgages to lower their payments.
- Self-employed people and contractors that need to be able to borrow money on “stated” income without detailed verification.
- Borrowers that can afford a loan but have other debts, like student loans.
- Those that need non-traditional loans with high fees.
While the law still allow a lender to make a loan that isn’t a qualifying mortgage, given that the loan won’t have the same legal protections, its costs remain to be seen. This could end up pricing people with special needs out of the home loan market.
One of the challenges you will face when deciding how much money to put down on your new home is whether to put down a larger down payment or to take a bit of money from your down payment and use it to pay “discount points” to lower your interest rate.