As we all know, mortgage underwriting since the financial and housing bubble collapse in 2008 has gotten more strict.
While thousands of mortgages have been originated and closed since 2008, Fannie Mae and Freddie Macs’ as well as the individual lender guidelines have tightened considerably.
The Consumer Protection Finance Act, also known as the Dodd-Frank Wall Street Reform Act created in 2010, has legislated what’s called a “Qualified Mortgage” or “Abilty To Repay” standard that goes into effect January 10, 2014.
What this means is that underwriting guidelines have been legislated from the Federal government and follow an “ability to repay the mortage” standard.
In the past, a mortgage underwriter would follow Fannie Mae, Freddie Mac, FHA or VA or their individual lender guidelines when underwriting a mortgage. Those guidelines were somewhat flexible.
What the Qualified Mortgage or Abilty to Repay standard does is limit debt to income ratios to no higher than 43%.
In addition to the 43% cap in debt to income ratios, there are eight criteria that have to be met to satisfy the Qualified Mortgage/Ability to Repay standard.
Here they are:
1. your current income
2. your current assets
3. your credit
4. the monthly payment for the mortgage
5. your monthly payment on other mortgages you may have
6. your monthly payments for taxes and insurance for other properties you may own
7. your other debts
8. your other debt in comparision to your income or how much money you’ll have left over after your monthly debt has been paid.
While the intent of the Qualified Mortgage makes sense, it will make it more difficult for some home buyers to qualify for a mortgage.
For example, if a borrower does not have established employment or whose income is unstable or who may not have suffient savings (i.e. cash), the mortgage application may be declined as not meeting the Qualified Mortgage standard.
Now the lender can originate a non Qualified Mortgage; however, the lender must make a reasonable determination that the borrower shows an abilty to repay the mortgage.
Given my experience in the mortgage banking industry, the borrower will have to have overwhelming compensating factors to alleviate an underwriter’s conservative view of the file.
In conclusion, the Qualified Mortgage rule or Ability to Repay standard will certainly reduce the number of future mortgage defaults, but it will also make it more difficult for borrowers or home buyers to obtain and qualify for a new mortgage.