Ability to Repay/Qualified Mortgage

In just over a week, new rules issued by the Consumer Financial Protection Bureau (CFPB) will go into effect. These rules are called the Ability-to-Repay/Qualified Mortgage (ATR/QM). The implementation of these rules will have a huge effect on the mortgage industry, and may impact a borrowers' ability to obtain a mortgage.

First, let's look at these rules will require. Under the new ATR/QM rules, mortgage lenders will need to show they made a good faith effort to determine the borrower's ability to repay the loan. There are actually two parts to the rules: the rules governing ability-to-repay, and the rules governing qualified mortgage.

Following the ability-to-repay laws are mandatory. It will be illegal for lenders to do loans that do not meet the ATR standards. To comply with ATR, lenders must look at the following: the borrowers' income and assets, employment status, monthly payment of the potential new mortgage, monthly payment of a simultaneous mortgage (such as a second lien), monthly payment for mortgage-related obligations (think HOA fees or insurance), current debt obligations, the debt-to-income ratio (DTI) or residual income, and credit history.

All lenders will need to be able to prove they considered the eight factors above, and are required to document it.

Following the qualified mortgage rules is not a law; it is legal for a company to do a loan that does not fit the qualified mortgage rules. However, the investors in the secondary market have made the decision they will not buy a loan that does not meet the qualified mortgage rules. This essentially forces all mortgage lenders to make sure their loans meet QM, as they need to do loans that are salable on the secondary market.

For a loan to be considered a qualified mortgage (and obtain legal protection called safe harbor), it must meet the following: the APR of the loan does not exceed the APOR (average prime offer rate) at the time of lock by more than 1.5-2.5% depending on the loan program, the points and fees of the loan do not exceed a set amount, and the DTI does not exceed 43% OR the loan has an agency exception like the FHA.

The points and fees for a loan cannot exceed 3% of the total loan amount, for loan amounts above $100,000. For loan amounts less than $100,000, it varies depending on the exact loan amount. To further confuse you, the total loan amount is NOT the same thing as the loan amount. The total loan amount is the amount financed minus any fees paid to an affiliate of the lender.There is a final part of this rule, which is called reputable presumption. This is when the loan exceeds the APOR threshold (and is therefore a high priced mortgage loan), but meets the other QM and ATR standards. A reputable presumption loan does not offer a mortgage lender the same legal protection as a safe harbor.

So what does this mean for the you, the consumer? Maybe a lot, maybe a little. In most cases, you won't be required to bring in more documentation. All the information required under the new rules, was required before. You'll still need to bring in the same W-2s, tax returns, etc. But now the lender has to provide additional documentation and proof that they did their due diligence in determining your ability to repay.

Some loan programs will be done away with, and some consumers will be affected. Loan terms longer than 30 years, interest only loans, and negative amortization will not be available soon as these programs do not meet the new requirements. Balloon payment programs will also not be available due to the new rules. These are the loan programs that were popular in the early 2000's and up to 2009 ish, as a way to get first-time home buyers into houses they otherwise would not have qualified for.

Mortgage insurance, the insurance that is required when you put less than 20% down, will also be undergoing a big change. And it is possible that mortgage insurance may become more expensive. This is because upfront mortgage insurance on conventional loans (like borrower paid single premium or split mortgage insurance) are required to be included in the points and fees of a loan. This will put almost all loans with upfront MI over the 3% threshold, and therefore won't be a qualified mortgage. Mortgage insurance on FHA, VA, and USDA loans are NOT included in the points and fees, nor is any MI you pay on a monthly basis.

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