Qualified Mortgages and The Consumer

by 01 Feb 2013

Last month, the Consumer Financial Protection Bureau unveiled new rules to help protect consumers from unscrupulous mortgage lending. These rules implement underwriting criteria what constitutes a "qualified mortgage". As long as the mortgage lender meets certain criteria, the consumer cannot sue a lender for not verifying income, providing a loan to a consumer they could not afford etc.

Most lenders will begin implementing the changes to their underwriting almost immediately although they have a full 12 months to implement the new changes. As some may already know, getting a mortgage loan these days is quite technical, every stone unturned every piece of credit, debt, income, and assets questioned and documented.

What the qualified mortgages stipulation will do to the underwriting process moving forward

It's not getting any easier these days to get a mortgage, these rules draw a line in sand between qualifying and not qualifying.

Detailed thresholds of a qualified mortgage:

  • income and assets must be sufficient to repay the mortgage
  • borrowers must document their jobs/ employment status
  • credit scores must meet minimum standards for the loan program being sought
  • monthly payments must be affordable
  • Consumer needs to be able to afford other monthly debt obligations associated with the property such as property taxes, fire insurance, mortgage insurance if applicable homeowners association payment.
  • lenders have to take into consideration other monthly debt obligations the borrower is obligated for in determining qualifying
  • Similar to current mortgage loan underwriting right?

The difference: there must be a clear and concise examination of every faucet of credit, income, assets and debt- importance will be given to this over time potentially making the mortgage underwriting process more stringent.

Why?

If there is any possibility the loan was made without verifying a pay stub, or questioning an additional business for example as reported on a borrowers federal income tax return, the lender becomes exposed to the possibility of a lawsuit down the road if the borrower is unable to continue making their house payment.

Put another way-The Qualified Mortgage Rules guarantee today's underwriting strictness will remain well into the future.

How A Mortgage Made Today Is Structured

A mortgage loan is made against a story, or rather an application accompanied with a credit report revealing liabilities the consumer is responsible for. After providing sufficient financial documentation, the lender will underwrite the financial picture of the borrower against the loan being sought, and renders a credit decision. If further documentation becomes necessary, the lender will ask the consumer for any updated documentation.

Mortgage Tip: Where things can become drawn out, is when another document is supplied for the original document needed which opens up more questions, which opens up the need for even more documentation, thus prolonging the process.

If your loan and credit criteria does not meet what the Consumer Financial Protection Bureau classifies as a qualified mortgage, you can still get a loan, to some degree.

You're debt to income ratio, the amount of debt expressed as a percentage of the total monthly mortgage payment combined with the minimum payments on any other liabilties you have cannot be more than 43% of your gross monthly, pretax income.

Many consumers are otherwise shut out of the market from being allowed to borrow mortgage money because they have an inability to provide supporting documentation with regards to income, assets, liabilities or credit. Ironically, many times these people show an ability to repay and cannot fully document their financials to the extent of the mortgage lender's requirement.

By Scott Sheldon.  If you are seeking a mortgage and find yourself being  subjected to overly tight credit requirements of the lender you're working with, send us an email for a second opinion scott@sonomacounymortgages.com. We successfully mitigate the back and forth process during a loan origination. Get a complementary mortgage rate quote on the loan program of your choice.

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