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The Ability-to-Repay Rule: How Does it Affect Consumers?

Posted by admin on February 5, 2014
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There is a lot to consider when calculating a monthly mortgage payment that fits within your budget. You must first consider your current income, your credit history, other debt, and expenses, and for many it can be confusing or overwhelming. It was this lack of knowledge that led consumers to take out mortgages they could not actually afford and resulted in the financial crisis. As a result, rules were established to prohibit lenders from making higher-priced loans without regard to the consumer’s ability to repay.

In fact, that’s exactly what this new rule is called: The Ability to Repay Rule.

Before beginning the mortgage process, there are a few items you should know about this new set of rules and how it will affect you in the near future.

Ability to Repay Rule

A mortgage lender must take your financial circumstances into consideration before making a mortgage loan.

This is great news for consumers because it prohibits lenders from qualifying homebuyers for a risky loan they may not be able to afford. Lenders must now determine whether the consumer can afford the loan they are receiving by verifying their financial records. Reliable documents include W-2 forms or pay stubs. The lender will also consider current income, employment status, credit history, potential monthly mortgage payment, monthly payments for other mortgage loans and other mortgage-related expenses, previously outstanding debt, and monthly debt payments compared to monthly income.

A lender must determine you have enough assets or income to pay back the mortgage.

Once your financial information is calculated and considered, mortgage lenders will also look at the money you have left over every month to pay for things such as groceries and electricity. These are things that might get overlooked by consumers initially. However, it is important that your monthly mortgage payment not make it difficult to pay for basic necessities.

See Also: Renting Vs Buying in Augusta, Georgia

Temporary low payment rates cannot be considered when determining ability to repay.

If you get an adjustable rate mortgage instead of a fixed rate mortgage, the rates will fluctuate and because of this lenders must consider the highest interest rate you may have to pay. This is to determine whether you have the ability to repay your loan even in a worst-case scenario.

The Ability to Repay Rule applies to most, but not all mortgage loans.

The Ability to Repay Rule excludes types of loans like home equity lines of credit, timeshare plans, reverse mortgages, and temporary loans.

Qualified Mortgages were created with more stable features to satisfy the requirements of the Ability to Repay Rule.

Qualified Mortgages are prohibited from having risky loan features such as an “interest only” period, a “negative amortization”, a loan term longer than 30 years, or “balloon payments. In certain instances when dealing with a small lender, a QM may have a balloon payment, but it is not common.

QM’s require a borrowers monthly debt including mortgage isn’t more than 43% of the borrower’s monthly pre-tax income.

There are limits on the amount of upfront points and fees with a QM.

(The cost of a credit report is not considered in this limit)

If a consumer believes their loan does not meet the definition of a QM they have the right to legally challenge their lender.

Ability to Repay Mortgage Rule

Don’t be discouraged if you discover you need to downsize the home of your dreams. The Ability to Repay Rule was put in place to protect homebuyers and their assets. It also prevents risky lending and will help direct you towards a home you can enjoy and afford for many years. A home is one of the largest investments you can make in your lifetime. The Ability to Repay Rule will help you make sure it’s a great one too.

For more information on Prudential Beazley Real Estate and to find a home in the Augusta Metro area that fits your budget, please call 706-863-1775.

Image Credit: Flickr

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