The Consumer Finance Protection Bureau (CFPB) has implemented certain laws decreeing that before banks grant a mortgage they must make a good-faith effort to determine that First Home Buyers, will be able to pay the loan back. The Ability to Repay Rule (ATR) went into effect in January 2014.
Why is the Ability-to-Repay Rule Important?
The Ability-to-Repay rule will make sure that consumers assume mortgage obligations that they can afford and it protects all parties from the negative effects of loan defaults.
Lenders must determine that applicants for mortgage loans will have the ability to repay the loan. All lenders must collect and verify certain consumer financial information including:
1. Current or reasonably expected income or assets
2. Current employment status
3. Credit history
4. The monthly payment for the proposed new mortgage
5. Monthly payments on other mortgage loans you get at the same time
6. Monthly payments for other mortgage-related expenses (such as property taxes, homeowners insurance, mortgage insurance, Condo fees)
7. Other current debt obligations including child support and alimony payments
8. Borrower’s current monthly debt payments plus the proposed monthly mortgage obligation compared to the borrower’s monthly income.Your monthly debt payments, including the mortgage, compared to your monthly income is … the all important “debt-to-income ratio”
You must have enough assets or income to pay back the mortgage.
Lenders have to verify income and credit information from a reasonably reliable third-party source. The lender must determine that you can repay the loan. If your income shows on your tax return, you might be able to use it to qualify.
Be prepared to provide copies of bank statements, mutual fund and 401k statements to prove you have the ability to cover the down payment statements and closing costs and any reserves to cover any financial problems down the road. https://mortgagemarketdigest.wordpress.com/2013/03/14/mortgage-application-checklist/
The allowable Debt-to-Income Ratio is capped at 43 percent.
That is, once the mortgage is issued, the borrower’s fixed debt service costs, including the mortgage, credit cards, car loans, student loan debt, and nearly anything else recorded by the credit bureaus, a Borrower’s DTI cannot be greater than 43 percent of pre-tax income.
This isn’t a radical change. For years now, whenever I meet with a new buyer, I always ask about their comfort level with a mortgage payment. We discuss debt repayment, taxes, insurance and PMI and back into the mortgage amount they can afford. I can’t recall the last time we ever got close to this cap.
What will be the Impact on First Home Buyers?
Buyers will likely find a more stringent loan approval process that requires a lot more documentation verifying the statements made on the application. Lenders already pull a current credit report and verify employment just before issuing a “Clear-to-Close” on the file. Don’t be surprised if lenders start asking for additional documentation to re-verify income and assets just prior to closing too.
It’s really back to basics in the mortgage industry. That’s what it should be and should have been. If a buyer has worked hard to deserve a new home and can afford one, then they should be able to buy one. Regretfully, it has taken federal regulation to try and strike a balance between protecting consumers from predatory lending to uneducated, unsophisticated consumers, and shutting off the flow of credit to the housing sector.
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