What The CFPB’s New “Ability To Pay” Rule Means For Homebuyers?

What The CFPB’s New “Ability To Pay” Rule Means For Homebuyers?The Consumer Financial Protection Bureau (CFPB) has adopted new rules designed to protect consumers from irresponsible mortgage lending practices. The new “ability to pay” rules requires lenders to verify that borrowers can repay their mortgage before they approve a loan. At a minimum, a lender must consider the eight underwriting standards listed below:

  1. Current income or assets.  The borrower must have income and assets that demonstrate his/her ability to pay a monthly mortgage payment.
  2. Current employment status. The lender must verify the borrower’s employment status and consider it sufficient to fund mortgage payments before approving a loan.
  3. Credit history. Lenders are no longer allowed to overlook excessively low credit scores or a troubled credit history. A debtor’s credit history must reflect their willingness and ability to repay creditors.
  4. The monthly payment for the mortgageLenders are prohibited from issuing loans that have a monthly payment amount the borrower clearly cannot afford.
  5. The monthly payments on any other loans associated with the property.  When looking at a borrower’s ability pay, the lender must consider all loans on the property. For example, if the debtor takes on two mortgages the lender must determine if the buyers can really afford it.
  6. The monthly payment for other mortgage related obligations (such as property taxes). Moderate income homeowners may find it difficult to purchase homes in areas with high property taxes. Lenders will also consider if a loan remains affordable when PMI (private mortgage insurance) is added.
  7. Other debt obligations. Homebuyers with high debt loads may need to reduce their debts before looking for a mortgage.

The monthly debt-to-income ratio or residual income the borrower would be taking on with the mortgage. Counting rental income when determining a borrower’s ability to pay could work in the favor of some borrowers. On the other hand, owing too much debt on second properties could make finding a mortgage difficult. To calculate your debt-to-income ratio add up your monthly debt and divide the total by your monthly gross income.

 

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