It is that time of the year here in Central New York where home buying activity typically picks up. Whether you are interested in getting a mortgage to purchase a new house or in refinancing an existing mortgage take a deep breath – the mortgage approval process continues to evolve and appears to be getting a little more complicated.
The mortgage approval process seemed to be fast and furious in the early 2000’s. A number of mortgage lenders seemed to go out of their way to approve applications based on minimal information and with a disregard for objective criteria. A large number of mortgage loans subsequently went bad and this was a contributing factor to the implosion of the nation’s economy and the Great Recession. In the aftermath of the economic crisis, Congress passed the Dodd Frank Financial Reform Act in an effort to stabilize the economy and address the conditions that contributed to the crisis. A number of provisions focused on the mortgage loan industry to help ensure mortgage lending would be done in a more prudent and objective manner. New rules for processing and approving mortgage loan applications went into effect earlier this year. The impact on potential buyers and borrowers is yet to be fully appreciated, but over the short term it looks like getting approved for a mortgage loan may just be a little more difficult than it was a year or two ago.
To help improve the overall quality of outstanding mortgage loans, the Consumer Financial Protection Bureau (CFPB) implemented new rules for mortgage lenders. The new rules encourage lenders to approve mortgage applicants who can satisfy a number of objective criteria that meet the CFPB’s definition of a “qualified mortgage”. The benefit to the lender is that the statute provides the lender protection from subsequent claims by borrowers that the lender approved them for loans that were destined to failure. And of course “qualified mortgage” loans will help keep federal regulators off a lender’s back during its periodic exam.
To satisfy the criteria for a “qualified mortgage” your lender needs to demonstrate that the mortgage loan will satisfy certain criteria, including what is referred to as the “ability to repay” (ATR) standards. Here are some of the highlights…
- Borrower’s debt to income ratio cannot exceed 43%;.
- The loan term cannot exceed thirty (30) years;
- Borrower’s closing costs cannot exceed 3% of the loan amount;
- Loan types are limited – no ‘interest only’, no ‘negative amortization’ and no ‘balloon payment’ loans; and
- Self-employed borrower? He/she needs to be prepared to provide lots of documentation.
So the bad news is that the federal government continues to tighten down on the mortgage loan industry in ways that may make it harder for an individual to obtain or refinance a mortgage loan. The good news, at least here in Central New York, is that the new requirements are not much different conceptually from what most local lenders were already doing. They may have to make some adjustments to their systems to meet the new requirements, but I would not expect any significant changes in the availability of mortgage financing.
Oh, and the other “good news” is that there is no requirement in the new rules that every new mortgage loan be a “qualified mortgage” loan. A mortgage lender is allowed to put new mortgage loans on its books that don’t satisfy the “qualified mortgage/ability to repay” standards. So if you are a potential borrower who may have some blemishes in your credit history, or other circumstances that limit your ability to satisfy the CFPB’s standards, don’t despair; there may still be options for you. You will just need to shop around some.
Whatever route you decide to take be prepared and be patient – institutional lenders are under federal scrutiny with respect to their mortgage lending practices which means potential borrowers should expect to be asked to provide all kinds of documentation in order for their mortgage loan applications to be processed.