By LISA PREVOST
New federal regulations require mortgage lenders to do what should go without saying: verify that prospective borrowers can pay.
Yet during the housing bubble, many lenders all but abandoned traditional underwriting standards, and the resulting wave of foreclosures has taken years to recede. An “ability-to-repay” rule, adopted last month by the Consumer Financial Protection Bureau and effective January 2014, is intended to protect borrowers from again falling victim to risky lending.
“The rule sets standards for what’s a safe loan and what isn’t,” said Kathleen Day, a spokeswoman for the Center for Responsible Lending, “and it takes away a lot of the tricks and traps that lenders were using to talk people into refinancing.”
Required under the Dodd-Frank Act, the rule prohibits the “no-doc” loans common during the bubble. Before making a loan, lenders must document the borrower’s job status, income and assets, debt, and credit history. Lenders must also calculate a borrower’s ability to pay the principal and interest over the length of the loan. They may not base their calculation solely on the payment due when an introductory “teaser rate” is in effect.
Via The NY Times
Full Article Here:
The New York Times
By VICKIE ELMER
Published: October 6, 2011
“WE regret to inform you…” Nobody applying for a new mortgage or a refinancing wants to see or hear these words. But last year more than two million people were turned down for home loans, according to federal data, often because they didn’t meet certain lender requirements or because their applications were incomplete or otherwise problematic.
And that number, from the Federal Financial Institutions Examination Council, doesn’t even include those who abandon the often-complicated mortgage qualification process. The Mortgage Bankers Association estimates that about half of those who try to refinance and 30 percent of buyers are either denied or drop out.
“A lot of people have credit banged up,” said Michael Fratantoni, the association’s vice president for research and economics.
Lenders’ underwriting criteria have become more rigorous in recent years; some banks have tightened up beyond federal requirements. Here are the six biggest triggers for rejection, according to industry experts.
INSUFFICIENT INCOME Lenders want to make sure you can afford to make the mortgage payments. Someone who earns, say, $40,000 a year need not bid on a $750,000 apartment, unless there’s a trust fund with quarterly payouts or other money available. Also, lenders typically look for at least a two-year track record of income, which could hurt those who may have switched jobs recently. “It’s common to get turned down if you have a gap in employment history over the last two years,” said Erin Lantz, the director of the Zillow Mortgage Marketplace, an online loan-matching service.