How Ability to Repay Guidelines Will Affect Potential Buyers
Purchasing a home is still part and parcel of the American Dream. In the wake of the lending crisis, though, the steps you must take to achieve that dream have changed a bit.
In August 2013, the Consumer Financial Protection Bureau (CFPB) released their second update to new mortgage regulations. While many of the ability to repay guidelines ostensibly change the way that lenders do business on their end, these changes will also affect you as a buyer.
Understanding the ability to repay rule
One of the changes that will have the biggest impact on buyers as a result of the CFPB rules pertains to the way that lenders determine a buyer’s default risk. Mortgage originators can no longer use teaser rates as a basis for determining ability to repay a mortgage. Instead, they must consider all of a buyer’s financial information, along with the buyer’s potential to repay both the interest and principal over the life of the mortgage. Before, lower introductory rates could be used as a determining factor. This made it easier for buyers to become qualified for a mortgage, but it was not an accurate reflection of their ability to manage costs effectively. Lenders will now have to consider the entire life of the loan, which may change the amount someone is qualified to borrow.
Lending restrictions: Getting tighter all the time
The CFPB regulations are intended to prevent the sort of lending that caused so many homeowners to go through foreclosures during the housing collapse. Lending regulations have been getting progressively tighter, and the debt-limit caps put in place by the new regulations make them even more complicated. Because overall household borrowing is restricted from totaling more than 43 percent of household income, many buyers are finding themselves priced out of the market. Prospective buyers with outstanding student loans or other debt may be forced to pay off those loans before they’re able to purchase an affordable home.
The CFPB estimates that up to 10 percent of borrowers could now be turned down for home loans. Acquiring a loan will require both buyers and lenders to be more creative, but that doesn’t necessarily mean buyers will be priced out of the market.
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