New mortgage rules and regulations went into effect in January 2014. The biggest changes involve new rules intended to protect borrowers from loans they cannot afford to repay. Other rules reduce the government's guarantee for mortgages in high-cost areas.
Qualified Mortgage and Ability-to-Repay Rules
On paper, the new Qualified Mortgage (QM) rules from the Consumer Financial Protection Bureau (CFPB) look like they really might restrict mortgage availability. New "ability to repay" rules require lenders to review borrowers' information to ensure they can afford to repay the mortgage. The Qualified Mortgage is a new category of loan that is supposed to improve the borrower's ability to repay. Qualified Mortgages have the following features:
- Terms no longer than 30 years
- A maximum debt-to-income ratio of 43 percent—meaning that if you make $5,000 per month, your total debt payments can't exceed $2,150
- No interest-only periods, negative amortization, or balloon payments (in most cases)
- Combined points and origination fees of 3 percent of the loan amount or less (loan amounts below $100,000 have higher limits)
The "ability to repay" portion of QM rules include the following:
- The lender must collect and verify your financial information, such as your current income, assets, employment status, credit history, and other debts.
- The lender must look at your assets and income to determine that you can repay the loan.
These rules might seem strict, but here's the good news: 87.2 percent of the mortgages made in 2012 already complied with these new rules. While non-QM will be ineligible for purchase by the GSEs or FHA, non-QM loans are not illegal. Their availability, however, likely will be limited to jumbo loans made by larger banks and retained in portfolio.
Changing FHA Rules
The popular Federal Housing Administration mortgage program is also going through changes. Starting on January 1, 2014, it lowered its maximum loan in high-cost areas from $729,750 to $625,500. This means that borrowers in higher-cost homes may need to find a jumbo mortgage instead of an FHA loan. While this won't affect most U.S. home buyers, it can impact people in high-cost areas like San Francisco, New York, Los Angeles, and Washington DC.
This change is in addition to the higher mortgage-insurance premiums that the FHA put into effect in April 2013. Since then, mortgage insurance premiums run 1.35 percent to 1.5 percent of loan balances. Paying these higher FHA mortgage insurance premiums is often the trade-off for borrowers wanting to make the 3.5 percent minimum down payment that FHA loans permit.
The Bottom Line on 2014 Mortgage Changes
These 2014 mortgage changes may affect some borrowers more than others. Self-employed borrowers, small business owners, and people living in high-cost areas could see more impact than other borrowers. The description above is a high-level summary—you'll want to talk to a licensed loan officer to see how these rules affect your situation.