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Mortgage Guideline Changes

Posted on March 1, 2013

The long awaited changes to the rules on “qualified mortgages” were released earlier this year on the 10th of January. The Consumer Financial Protection Bureau has set forth these rules in order to protect borrowers from predatory lending, while simultaneously granting protection from litigation to those lenders who abide by the rules. Essentially, these new guidelines will ban the types of high risk loans that many economists say are at the root of the rapid expansion and subsequent collapse of the housing bubble. These types of predatory loans include interest-only mortgages, stated income loans, mortgages that include most types of balloon payments, and those with negative amortization causing the principal to grow over time.

A major factor in these new guidelines is a rule based on a borrower’s ability to pay. This rule sets standards for lenders to follow when determining a borrower’s eligibility for a loan. Lenders are going to be required to look at a borrower’s ability to pay the loan back both in the short-term and the long-term. This rule will abolish loans based on a borrower’s ability to pay at so called “teaser rates,” and will require lenders to look at all income, assets, debt loans and credit history in relation to the monthly loan payment. Under these new guidelines a borrowers total debt obligations will need to be equal to or less than 43 percent of their monthly income. This 43 percent is including the mortgage and all of the ancillary costs. Hopefully this rule will limit predatory lenders from setting up consumer’s to fail.

Notably absent from the change in guidelines is a standard minimum for down payments. In discussions about how best to improve mortgage lending some proposals ran as high as demanding 20 percent as a minimum to consider a mortgage qualified. Many lenders balked at this restriction citing the fact that this could severely limit lending and in the end it does not show up in the new guidelines.

This change in guidelines will likely greatly benefit lenders who follow the new more rigorous standards. It offers them protection against liability in the event that a borrower defaults on their mortgage obligations. However, it will still be possible for a consumer to claim that the lender did not in fact follow the new rules.

The mortgage industry has responded with cautions optimism while expressing concerns about how the new stringent guidelines could affect smaller mortgage brokers. One of the new rules imposed upon lenders is a limit of three percentage points on fees and points a lender can charge. This change leaves little room for other costs they may incur above the standard 2.5 percent of the loan they take for their fee.

Interestingly, government-favored financial institutions are exempt from these new guidelines. For example, the Federal Housing Association is exempt from the new rules. The same is true for both Freddie Mac and Fannie Mae. These latter two entities alone have already benefitted from nearly $190 billion in bailout money.

Whether these new changes will help prospective homeowners avoid mortgage scams, or will simply offer banks a safe haven from litigation we will have to wait and see. These new guidelines will not take effect until January 10, 2014, and even then it will be seven years before all of the provisions are phased in.

Additionally, another federal agency is planning on releasing additional regulations to prevent people from obtaining mortgages that they can't afford, and to protect consumers from predatory lending. Because the Federal Housing Administration or FHA is exempt from the Consumer Financial Protection Bureau changes, it has the authority to issue its own qualified mortgage rules. In the near future expect to see new guidelines coming from FHA. This will be an important topic to follow because the FHA is the largest mortgage issuer in the world.

Be sure to keep coming back to our blog to find out more as this issue unfolds. Also, visit our website at to find out more about Washington real estate.





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