There are several new rules and changes that will take place in the mortgage industry when we ring in the New Year in a few weeks and all of these changes, as well as a lot of false information that is running rampant, are causing much chaos and confusion. So, what are these new rules and which ones are more important to make note of? Right now we’re going to briefly cover the information for you so that you can be prepared when they go into effect.
Perhaps one of the biggest confusions is being caused by two of these new rules having similar names – the Qualified Mortgage (QM) rule and the Qualified Residential Mortgage (QRM) rule. The QM rule is one of the main rules to be familiar with because a lot of other new rules and changes are based off of this rule; its main purpose is to decrease risk in the mortgage industry. Some of the highlights of the Qualified Mortgage rule are no negative amortization or balloon payments, a 3% limit on lender’s points and fees as well as a 43% debt-to-income ratio limit. This last factor could, in fact, keep some potential homeowners from being able to get a mortgage. Lenders that adhere to the new QM rule will be provided with more legal protection than those that don’t, so borrowers should expect most lenders to accept these changes willingly.
The next new rule, the Qualified Residential Mortgage rule, while similar to the QM rule with regards to the debt-to-income ratio, negative amortization and balloon payments, is actually different in the fact that the regulations are geared towards lenders and investors. Essentially, an investor can purchase the loan from the lender without risk retention limits if it meets the requirements of the QRM.
Another important rule to be aware of is the Ability to Repay (ATR) rule. The ATR isn’t really causing any changes in the mortgage industry, but in fact, is aligning with the QM rule to ensure that a borrower’s income and assets are being verified; this is technically something that should already be getting done, however by implementing this rule it offers borrowers further protection against being approved for a loan that they can’t actually afford.
With all of these new changes, you may be scratching your head and wondering how it is going to affect you. If you are a household that has a high amount of debt, you can expect it to be tougher to qualify for a mortgage thanks to the increasing debt-to-income ratio and, if you do, you’ll be required to provide several different documents to help you lender verify your income and assets. Keep in mind that lenders don’t necessarily have to adhere to these rules but it is highly likely that they will because of the extra legal protection it provides.