As I discussed earlier this week, there are new regulations which will go into effect on January 10 which will impact the mortgage industry pretty significantly. Of all the new changes, the most important to borrowers is the “ability-to-repay rule,” which sets new standards on what is and is not an acceptable mortgage.

This new rule, which was designed to protect borrowers from predatory lending practices, sets firm limitations on what type of mortgages can be underwritten. This includes limiting the types of features a loan may have as well as the debt to income and fees which may be associated with the loan.

The features which have been eliminated from the mortgage industry through this regulation are features which are considered “toxic.” These features include interest only loans, negative amortizing loans, balloon loans, and loans with a term of more than 30 years. Basically, the law is attempting to create a system where borrowers are purchasing homes with constant monthly payments and no hidden costs in the future.

As for the fees, the limit is roughly 3% of the total loan amount as upfront costs and fees. This limit again protects clients who may not understand or be told about the fees at the time of application.

Finally, and probably most importantly for borrowers working with a reputable lender, the debt to income ratios now have a hard cap of 43%. In the past, the cap was 45%, but there were ways to pass a loan through with rates over 50%.

Now, a lender can still legally approve a loan that does not fit these guidelines, but if they do and the house goes into foreclosure, the borrower will have the right to sue the lender for creating an inappropriate loan.

If you have any questions about how these new regulations might affect you should you decide to buy a house next year, please contact me. And if you have anything else to add about the new Dodd-Frank regulations and qualified mortgages, please leave a comment.