Buying or refinancing? New mortgage regulations might affect you

New rules from the Consumer Finance Protection Bureau (CFBP) went into effect on Jan. 10. These regulations are reshaping the key aspects of the mortgage application process — and potentially the mortgage industry itself. The new rules will create wrinkles for some people seeking a new mortgage, either for a purchase or refinance.

After the financial crisis of 2008, Congress created the CFPB and charged it with enacting regulations to avoid a repeat of the housing crash. Now, for the first time, the government has defined a “qualified mortgage” standard. A qualified mortgage must not include features the CFPB considers risky, such as interest-only or balloon payments. Also, qualified mortgages can be issued only when certain universal “ability to repay” standards are met.

These and other new rules are meant to protect consumers from predatory lending practices that contributed to the housing crisis. When a bank issues a qualified mortgage, that loan receives a governmental stamp of approval: The borrower cannot successfully sue the bank on grounds that the loan never should have been made. That’s a good protection against unscrupulous lenders encouraging people to take loans beyond their means.

However, the new rules also mean some borrowers who would have previously qualified for a mortgage may not be able to obtain a qualified mortgage under the new rules. In particular, a sharp focus on the debt-to-income ratio may trip up some people — even those with substantial assets. A qualified mortgage cannot be issued if total monthly debt payments (housing, auto, student loans, other) are more than 43% of current monthly income.

While 43% seems high, some people have atypical circumstances that may keep them from qualifying. For example, a recent news story references borrowers who were unable to refinance a $2 million home with $1 million in home equity — despite a high net worth and perfect credit — because their current income failed to meet standards. However, borrowers who don’t quite fit the universal profile anticipated by the new rules shouldn’t be disheartened. Just be aware you may need to shop around a bit more.

For most borrowers, the debt-to-income focus will be a non-issue, though everyone can benefit by attending to other factors such as credit score, employment status, and assets available for down payments and expenses.

Brian Showers is the mortgage sales manager at the Madison mortgage lending office of Wisconsin Bank & Trust, a community bank with assets of $643 million serving clients statewide.

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