Know Before You Owe

Have you ever asked yourself, “Can I afford this house?” For most of us, buying a home means taking out a mortgage loan. The recent financial crisis and nationwide foreclosure epidemic exposed the truth that many homeowners were in a house that they simply could not afford.

In January 2014 the Consumer Financial Protection Bureau (CFPB) instituted what is referred to as the “Ability-to-Repay” rule designed to protect mortgage lenders and potential homebuyers from purchasing more home than they are able to afford. Under the new rule, mortgage lenders look at a potential homebuyer’s income, assets, savings and debt and then weigh those against the monthly payments over the long term of the mortgage to determine if they are in a good financial position to purchase a home.

Loans within the guidelines are called “Qualified Mortgages.” This designation gives lenders (and homebuyers) greater certainty that the home buyer is meeting the Ability-to-Repay requirement. To be a Qualified Mortgage, the loan:

• Cannot have excessive upfront points and fees
• Cannot be longer than 30 years
• Cannot have certain risky features, such as paying only interest and not principal, or paying less than the full amount of interest so that the total debt grows each month
• Must be in one of three categories:

1. The monthly loan payment, plus the borrower’s other debt payments, does not exceed 43 percent of the borrower’s monthly income; or
2. The loan qualifies for purchase or guarantee by a government sponsored enterprise (Fannie Mae or Freddie Mac), or is insured or guaranteed by a federal housing agency; or
3. The loan is made by a small lender that keeps the loan in portfolio.

It is ultimately up to the lender if they want to follow these rules and guidelines. A lender can still make a loan based on their reasonable, good-faith determination that the borrower has the ability to repay. But simply put, the Ability-to-Repay rule is intended to prevent consumers from getting trapped in mortgages that they cannot afford and helps provide guidelines for lenders to keep them from making loans that consumers do not have the ability to repay.

Source: Consumer Financial Protection Bureau