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New mortgage rules aim to prevent risky loans

Jan 10, 2014

New mortgage rules took effect on Friday that set out to protect borrowers against risky lending practices. One of the biggest changes is that borrowers will likely need to show more proof that they can actually afford the mortgage they are applying for. 

The two main terms to know from the new rules are the “ability-to-repay” rule and qualified mortgage, or, “QM.” The ability-to-repay rule requires mortgage lenders to ensure borrowers can actually afford their loans over the long term, meaning applicants’ income, assets, savings and debt will be more closely scrutinized. 

QM loans must meet at least some of the following guidelines: they cannot contain risky features, such as terms that exceed 30 years or interest-only payments; carry more than three percent in upfront points and fees for loans above $100,000; or push a borrowers’ total debt above 43 percent of their monthly income unless the loan qualifies to be backed by Fannie Mae, Freddie Mac, the FHA, or a small lender.

The new rules may make it more difficult for borrowers who have fluctuating incomes or self-employed individuals to validate their incomes, according to Goldman Sachs. The 43 percent debt standard also may prove a hurdle for some borrowers who find they can’t qualify for the loan they need to buy the house they want, and some borrowers may find they need larger down payments to keep within that 43 percent rule. 

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