On January 10, 2014, the Consumer Financial Protection Bureau placed into effect the new Ability-to-Pay rule. This new rule amends regulation Z under the authority of the Dodd-Frank financial industry reform. It requires mortgage lenders to consider the consumer’s ability to repay home loans before extending them credit. There is also a category of loans, called “Qualified Mortgages”, that limit how much of a home buyer’s income can go towards debt.
A lender is presumed to have met the “ability-to-pay” requirements if the lender makes a Qualified Mortgage. A Qualified Mortgage must meet certain requirements and cannot have certain risk features such as:
- An “interest-only” period, when you pay only the interest without paying down the principal.
- “Negative amortization”, when the loan principal increases over time, even though you are making payments.
- “Balloon payments”, which are larger-than-usual payments paid at the end of the loan term. However, these are allowed in some cases.
- Loan terms that are longer than 30 years.
- Generally your monthly debt, including your mortgage, cannot exceed more than 43% of your monthly pre-tax income (there are some exceptions).
- Qualified Mortgages don’t allow lenders to charge excessive upfront points and fees, and have limits on discount points.
The highlights above were provided by the Consumer Financial Protection Bureau and the Federal Reserve. More information can be found at http://www.consumerfinance.gov and http://www.federal reserve.gov.