The Consumer Finance Protection Bureau's new mortgage rules have created the concept of a "qualified mortgage" – one which entails strict guidelines for lenders and borrowers alike. While this is a laudable attempt to regulate mortgage lending in order to avoid a repeat of the still-resonating housing crisis, there are some aspects of the new rules that could make mortgages more difficult to obtain for certain buyers.
The 43% rule puts the emphasis on income
This is a biggie, and could affect certain prospective homeowners, such as the self-employed and retirees, more than others.
In its quest to create loan parameters that would practically guarantee the borrower's ability to repay, the CFPB has placed a maximum debt-to-income ratio of 43% on qualified mortgages . Even if the mortgage is not of the "qualified" variety, the lender still needs to determine the borrower's ability to repay the loan.
While a 43% debt-to-income limit doesn't seem onerous, it could cause problems for those whose income profiles don't mirror the 9 to 5 crowd. Self-employed persons and retired folks could have issues, particularly since lenders now have less flexibility in lending, and low-documentation loans generally used in the past are now off the table.
The CFPB is aware of the concern that the additional documentation could impact loans for groups like the self-employed. In its Ability-to-Repay Rule fact sheet, however, it also acknowledges that these rules are necessary to safeguard against another mortgage crisis, and states that it has issued guidance to lenders regarding verifying irregular income.
Coming up with two years' worth of income that fits the bill can be difficult enough for longtime entrepreneurs, but for those just starting out, it may make getting a mortgage impossible. A recent article in the LA Times tells the story of a new freelancer that was turned down for a refinance on one of his properties based solely upon the fact that he could not produce two years' worth of self-employment income – despite having no debt, and four paid-for real estate properties.
Retirees may also find themselves in a similar situation, having little income yet holding plenty of assets. In addition, retirees often downscale, meaning that they may be applying for a smaller loan of less than $150,000. With fees capped at 3% for every $100,000 lent, smaller loans may become less attractive to lenders – particularly since the administrative costs to the bank are the same no matter the size of the loan.
Of course, the self-employed and those that have retired might be able to procure a non-QM loan, if they can find a lender willing to offer such mortgages. Chances are very good that these borrowers would wind up paying much higher fees and interest, however, since those loans will be riskier for the lender – which could face legal claims later on if the loan defaults.
The new rules are barely one month old, so how much of an effect they will have on particular borrowers is still unknown. To his credit, CFPB Director Richard Cordray has indicated that the bureau is monitoring the situation , and is willing to make changes if real problems arise. If too many people are shut out of home ownership due to QM rules, let's hope that corrective action will be swift.