New mortgage regulations mandated by the Consumer Financial Protection Bureau went into effect this month. The rules are meant to hold lenders liable for bad loans and protect borrowers from loans they can’t afford.
Here are five ways the rules affect a home purchase:
1. New servicing standards: Existing homeowners will either get a monthly statement or a coupon book from their lender showing the current loan balance, payment amount and next due date. While some borrowers already receive monthly statements, all mortgage lenders are now required to provide them.
2. Underwriting criteria: Lenders will require more documentation of ability to repay from new homebuyers applying for a loan. At a minimum, creditors generally must consider eight underwriting factors:
- current or reasonably expected income or assets
- current employment status
- the monthly payment on the covered transaction
- the monthly payment on any simultaneous loan
- the monthly payment for mortgage-related obligations
- current debt obligations, alimony, and child support
- the monthly debt-to-income ratio or residual income
- credit history
3. Debt ratio: The Consumer Financial Protection Bureau set a number for determining if a buyer can afford their mortgage payments. The number — the debt ratio, or what percentage of monthly income is used to pay debt — is 43 percent. Debt includes payments on student and auto loans, credit cards, alimony and child support.
A loan to a borrower with a higher than 43 percent debt ratio is considered high risk and might not get approved.
Before, consideration of debt to income was at the discretion of the lender.
Lenders can still make loans that don’t meet the 43 percent debt ratio standard, but might not be able to sell these loans, which creates more risk for the lender.
4. Struggling borrowers: Lenders now have certain obligations to meet with people having trouble paying their mortgages. For example, a foreclosure cannot be initiated before 120 days of default. During that time, lenders are to work with homeowners on loan modifications or refinances to keep them in their home.
5. Timeliness: Other rules require lenders to fix issues quickly and credit payments quickly. Mortgage servicers will now have to call or contact most borrowers by the time they are 36 days late on their mortgage.
ONE THING THAT HASN’T CHANGED:
Payment history: Past payment history is still a big deal, including your credit score, for obtaining a home loan.
SOURCES: Consumer Financial Protection Bureau; and Tim Mislanky, senior vice president and chief lending officer of Wright-Patt Credit Union Inc.