By Anessa V. Cohen
There are new mortgage qualification rules that come into effect in January 2014, brought to you by Congress but regulated by the Consumer Financial Protection Bureau. This new rule is called the “Ability to Repay” (ATR) rule.
The purpose of this additional qualification rule is to provide some protection to creditors who make loans consistent with traditional underwriting standards and to protect lenders buying mortgages from potentially lax verification processes that might have been utilized when underwriting the original mortgage.
Under this rule, making sure that the borrower has the “ability to repay” any loan that has been approved by a lender remains the responsibility of the originating lender for the first three years after the loan has been originated, unless they follow the new ATR guidelines. If the guidelines have been followed by the originating lender, this will protect that lender from any problems that may come up after selling that loan to another lender in the event that, at some point down the line, the borrower goes into default.
The basic idea behind the new ATR rule is to put a focus on originating lenders, with a more monitored system of verifying the actual income of a potential borrower, setting strict guidelines to make sure that a borrower really has the ability to repay the loan he or she is applying for.
Now, we know that when we apply for a loan, the first request is always for paystubs, W-2 forms, and tax returns. But this new rule goes a little further than just seeing whether or not the income exists on the papers you would submit. The following are the minimum standards that are the heart of the new law, which also requires that all income submitted by a borrower be verified by reliable third-party documentation.
• Current or reasonably expected income or assets
• Current employment status
• Monthly payment on the covered transaction
• Monthly payment on any simultaneous loans or credit obligations
• Monthly payment for mortgage-related obligations
• Current debt obligations, alimony, and child support
• Monthly debt-to-income ratio or residual income; and
• Credit history
The ATR rule applies to any consumer credit transaction that is secured by a one- to four-family dwelling.
• Business purpose loans
• Home equity lines of credit
• Timeshare plans
• Reverse mortgages and bridge mortgages
The other changing factor in the “ability to repay” rule is the percentage used to qualify a borrower. Whereas the industry standard percentage always used was a maximum 28% for mortgage, taxes, and insurance obligations against borrower’s adjusted total income, a higher percentage of 36% is the standard, after adding additional debt obligations into the totals (debt includes credit cards, cars, and other loan obligations that a borrower would have on a monthly basis). Although 36% is the industry standard, it was not unusual—when a borrower’s credit was very good—to even go as high as 49% in some cases and get the loan approved.
The new ATR rule calls for a maximum ceiling of 43% for all new loans. The exception to the 43% ceiling is if the loan meets the guidelines of the secondary market including the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation under the conservatorship of the Federal Housing Enterprises Finance Agency (FHA loans or other special government-insured loans).
These new guidelines will probably cause the biggest dent in the self-employed borrower who will now be required to show stronger and more documentation. Self-employed borrowers will have to show at least two years of consistent income satisfying ATR rules as well as profit-to-loss documentation prepared by an accountant to substantiate present income before they will be able to qualify for a new mortgage. v
Anessa Cohen lives in Cedarhurst and is a licensed real-estate broker and a licensed N.Y.S. mortgage originator with over 20 years of experience, offering full-service residential, commercial, and management real-estate services (Anessa V Cohen Realty) and mortgaging services (First Meridian Mortgage) in the Five Towns and throughout the tri-state area. She can be reached at 516-569-5007 or via her website, www.AVCrealty.com. Readers are encouraged to send questions or comments to anessa.cohen@AVCrealty.com.