New Mortgage Rules: Ability to Repay and Qualified Mortgages

As many of you have heard, there are some new regulations that have gone into effect for mortgages as of January 10, 2014. There are two basic components of the regulation, one is the ability to repay and the other is the qualified mortgage. While they seem complicated and onerous, the reality is that not much will change in the way most mortgage lenders do business.

Ability to Repay (ATR)

This regulation mandates procedures that we as a lender already follow. We already qualify borrowers on their ability to repay the mortgage, and I have done loans this way since my first year in the mortgage business in 1986. This new rule just standardizes the process. There are 8 components that underwriting has to analyze to determine the borrower’s ability to repay. They are:

1. Income and assets
2. Employment history and status
3. Monthly payment on the new mortgage
4. Monthly payment on any other mortgage on the subject property
5. All other mortgage related obligations (i.e. other properties)
6. Current debt
7. Monthly Debt-to-Income ratios
8. Credit history

The biggest change is that we have to be very thorough in our documentation to prove that we comply with these 8 items. All data has to be more complete and more accurate than ever, but the essence of qualifying a mortgage borrower is still the same. As a lender we have to worry about careful record keeping and documentation of each loan to ensure compliance with this regulation, but this does not mean it will be harder for mortgage borrowers to get a loan, nor does it mean they will now qualify for less. This may mean that the mortgage consumer has to provide more paperwork, but it does not materially change how much they qualify.

Qualified Mortgage (QM)

Mortgages that meet the QM standard are exempt from a borrower claiming that they were not qualified at the time of the loan. To be considered a QM, the loan has to meet a few standards. They are:

1. Points and fees cannot exceed 3% of the loan amount (for loans over $100,000).
2. Debt-to-Income cannot exceed 43% unless there is an automated underwriting approval.

In summary, mortgage paperwork is more thorough and detailed, which seems to be typical in the mortgage industry since 2008; however, loans are still being made, and no one who believes they are qualified for a mortgage should shy away from the process.