How the Qualified Mortgage & Ability to Repay Rule Will Impact You

2014 is shaping up to be  another year of significant change in the mortgage and real estate industry that will affect home buyers, home owners and others involved in the real estate and finance industry.

My goal is to explain and help you understand How the Qualified Mortgage and Ability To Repay Rule will impact you.

We have already been alerted to FHA reducing their county loan limits and how it will hurt Riverside County.  Then there’s the elimination of eligible USDA boundaries in Riverside County.  What more could there be?

Many people believe QM and ATR will be a GAME CHANGER for the housing and finance industry, but most of that is just scare tactics.

QM Update 1/22/2014: It’s been 12 days since QM was implemented and it’s business as usual, no unusual DTI limitations when receiving a DU/LP automated approval from Fannie, Freddie, FHA, VA, USDA.  We never front loaded our loans with origination fees or points like other lenders do so the 3% cap is a non issue for us.  We don’t offer toxi loan features…so that a non-issue for us.  And we have always properly documented borrowers ability to repay….why would we want to pre-approve a borrower for more than they can reasonably afford?

Qualified Mortgage (QM) & Ability To Repay (ATR)

Beginning January 10, 2014, the new Qualified Mortgage (QM) and Ability to Repay (ATR) regulations/rule will take effect.  Back in 2010, the  Dodd-Frank Act was passed to eliminate predatory lending and protect consumers.  This birthed a new oversight agency called the Consumer Finance Protection Bureau (CFPB).

The CFPB recently approved more restrictive qualifying guidelines to reduce their risk on loans that will be purchased or securitized by Fannie Mae or Freddie Mac (Conventional financing).

When lenders offer loans that conform to QM/ATR rules, they receive more legal protection (lawsuits and buy backs) from Fannie/Freddie when a borrower defaults on a QM loan.  Borrowers, in turn, are assured they are not being taken advantage of with fees and truly can afford to repay the loan.

==> Question:  How do you feel about the government telling you what you can/can’t afford and over complicating the mandatory documentation process?  Please share your comments below.

Key Features – QM/Ability to Repay Rule Starting January 10, 2014.

  • Set the max DTI ratio at 43% to ensure lenders don’t over qualify and allow people to buy too much home.  This is for manual underwritten loans.
    • There is a ‘temporary’  provision that allows a mortgage to still be considered QM compliant with DTI’s over 43% if approved through the DU/LP automated approval system for the next 7 years.
  • Set limitations on points and/or fees that can be charged to 3%.  All good stuff….this includes mortgage broker compensation along with all the third party fees from title, escrow, notary, appraiser, etc…
  • Set standards for documenting that a borrower truly has the Ability to Repay the loan.  Lenders must properly document current or expected income, assets, credit, employment status and other debt obligations not on a credit report (like child support/alimony etc.), and determine whether a borrower has a reasonable chance to repay the loan.
  • No toxic features like interest only, teaser rates, pre-pay penalties, terms longer than 30 years, no neg-am adjustable rate mortgages (ARM’s), and no balloon payment loan programs….but what borrower would want those anyways:-)

Special Note: The 43% DTI will not be a deal killer if your lender still accepts higher DTI ratios with a DU/LP automated approval (temporary QM).  This means it’s critical your loan officer knows how to calculate qualifying income exactly as an underwriter would and runs DU/LP before knowing how much you will really qualify for.

I suspect underwriters will become even more obsessive to calculate income correctly and quite possibly, err on the more conservative side to insure QM compliance.  Why?  Because originating & approving a non-QM complaint loan will be very costly to a mortgage lender.

FHA/HUD Qualified Mortgage Rule

The FHA Qualified Mortgage rule was just announced and essentially adopted the same guidelines as Conventional Fannie Mae/Freddie Mac financing.

There has been no written communication from VA or USDA on their position regarding QM.

What About Non-Qualified Mortgages?

Investment bankers are free to create and offer risky high DTI ratio non-QM loan programs, but there is more risk down that path…..lawsuits cost a lot of money and borrowers love to sue.

Lenders/investors who do offer non-QM loans and more risk will charge a premium on rate to compensate for their level of risk.

Currently, there are no investors or banks interested in lending money on non-QM loans that are now deemed to be “high risk”.

However, I can’t imagine the government agencies agreeing to QM/ATR without some sort of back room hand shake agreement from wall street private investment banks who say they will fill the gap the CFPB just created.

What Does All This Mean?

What does this mean (double rainbow style) for real estate, mortgage and housing industry related services?

Mortgage layoffs, fewer transactions, expired listings, and real estate agents will have to be more strategic and effective in their marketing as the market shifts.

I think it will be more important than ever for industry professionals to carefully choose who they partner with to navigate the new world of lending in 2014 to reach common goals.

It’s not the end of the world for buyers, but whatever you do, try buying now before mortgage rates go up any higher.

It’s not the end of the world for sellers, but I suggest you list your home before buyers rates go up.  It will be even more important for you to hire a Realtor who has a proven track record as a listing agent, creative marketer, and proven they can attract the right buyer at the right price.

I suspect 2014 will see an unprecedented number of home buyers wrongly pre-approved and escrows cancelled due to borrowers unabel to perform, mostly caused by the lack of understanding of these rule changes by individual loan officers.

The Bottom Line

Bottom line is, QM does not necessarily mean you won’t qualify with a DTI ratio over 43%.  You just have to trust the loan officer is correctly calculating your income as the underwriter or government auditor will….and make sure you receive DU/LP approval.

Real Estate Agents should advise their sellers to NEVER accept an offer until they know the buyer has at minimum, a DU/LP approval, and pay close attention to the DTI ratio!  This is where a PreferredBuyer™ Advantage loan approval will be even more valuable to both buyer and seller.  Contact me if interested.

2014 Will Reward Those Who are Prepared

Make sure you are working with a reputable, local, experienced loan officer who stays on top of these industry changes, tracks the bond market to help borrowers lock in the best rate, has access to all loan programs, and able to navigate you through these crazy regulations.

My friend Dan Keller just published this video that supports my understanding of QM and the ATR rule.

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