Mortgage qualification is a process carried out by lenders to ensure that the borrowers can meet the monthly repayments. Lenders have traditionally used the term in an informal way. However, a ‘Qualified Mortgage’ has now become a defined term. A requirement of the 2010 Dodd-Frank Act, a qualified mortgage is fundamentally one that the borrower can be reasonable expected to repay without difficulty.
Introduced by the federal government’s Consumer Financial Protection Bureau (CFPB), the new rules have been become mandatory as of January 10, 2014.
Mortgage Qualification Process
The Mortgage Qualification process places an onus on lenders to make sure that borrowers are able to meet their loan repayments without undue difficulty. The terms of the rule addresses the needs of both the borrower and mortgage lender. Mortgage qualification is not without its problems, and many fear that the definition might be too constrictive.
Among the factors taken into account are:
- Debt to income ratio
- Past credit history
- Credit or FICO score
- Type of employment
- Security of employment and income
- Size of down payment
- The type of mortgage applied for
- Mortgage history
A potential problem is that the need for a qualified mortgage could be counter to the fundamental objective of the rule. It could make it more difficult for many people to be offered home loans, particularly first time buyers and those on lower incomes. It could result in 30 year standard mortgages becoming the norm, and interest-only deals, for example, being used very sparingly. In fact, the new rule prohibits such payments.
Qualified Mortgage Exceptions
The new rules would enable non-profit lenders to offer mortgages to lower income borrowers without the need for the full mortgage qualification process. Exceptions will also be made for some forms of ownership stabilization programs, such as the ‘Making Home Affordable’ program that enables owners to avoid foreclosure.
It should come as no surprise that most mortgages offered today meet the qualified mortgage parameters. What is not so clear to many are the mortgages that do not, such as the interest-only mortgages mentioned above.
There are other changes penciled in that will become effective at the same time as the Ability-to-Repay rule. Some of these are aimed at making the rules regarding the qualified mortgage process much clearer to consumers – and to those that implement them.
The CFPB will be taking steps to familiarize the public with what mortgage qualification means. They will produce videos and presentations in plain language so that everybody should be able to understand the concepts.
What it Means to You
What does this mean to you if you intend buying a home within the next year or so? First, you must get together all the paperwork you can to prove your income and your ability to maintain your mortgage repayments. This is basic to mortgage qualification today. Also check up on your credit report from Experian, Equifax and TransUnion. Make sure it is accurate, and try to improve your credit score if you can. A mortgage professional can help you with these tasks if you are unsure of how to proceed.
Don’t let mortgage qualification worry you. It has been devised to help you get a mortgage you can afford, rather than have you getting into repayment difficulties later. A qualified mortgage means that the professionals have confidence in your ability to pay. You might not like a refusal, but that’s better than a foreclosure a few years down the line. If your earnings are secure and the mortgage repayments within your means, then you chances are that you should do well. Have questions about if you qualify? For more answers to your mortgage questions, please call Anthony DiLeo at (732) 264-2700 x18 or email [email protected]