Posts Tagged ‘43% DTI cap’

A patch for the QM patch

July 14, 2020

Back in February 2020 BC (before Covid), the Qualified Mortgage Patch (QM patch) situation made headlines in the mortgage industry. And a month later, Covid took over all headlines.

The Consumer Financial Protection Bureau (CFPB) provided an update to the QM patch. For those of you who like reading, check out my previous posts on the proposed changes to QM loans and the history of how we got to QM loans.

The TL;DR version is simply… there is a debt to income exemption for those applying for a mortgage backed by Fannie Mae, Freddie Mac, FHA, VA and USDA loans. The CFPB wrote in 2014 the debt to income ratio could not exceed 43%, yet allowed a temporary “patch” to allow the loan programs listed above time to transition.

Eliminating the patch would be shattering for the mortgage industry. Conventional loans (Fannie/Freddie) allow for a debt to income ratio up to 50%, and FHA can go as high as 55%.

I know what some readers may be thinking… “someone should not be able to purchase a home with a debt load that high.” While I get the sentiment, it isn’t always straight forward as “too much debt.” Here are some examples:

  • self employed borrower writing off a lot of their gross income. This lowers what appears to be their income on paper through the “magic of accounting,” yet their real income is higher.
  • joint applicants deciding to apply with only one person. Let’s say two people are buying a home. One has great credit. The other does not. The person with great credit qualifies (barely) on their own, so on paper the debt to income ratio is high. But without the other applicant, we are not seeing the true house hold income (because the other person’s income is not on the loan).
  • Often student loans allow for income-based repayment, yet many loan programs require student loan payments to be either 1% of the balance OR an amortized payment. The higher debt to income ratio allows the higher student loan payments to be absorbed when the client actually won’t be making that high of a student loan payment.

Almost all of my clients with high debt to income ratios fit in these boxes. Meaning the real household cash flow is better than what loan guidelines allow. By requiring a maximum 43% debt to income ratio, it will really hurt many buyers out there (especially those with student loan debt).

The proposed change by the CFPB – eliminate debt to income qualification entirely (Really?ok.), and use a price based approach (measuring the loans APR to an average prime rate of a comparable transaction) as a more reasonable indication of someone’s ability to repay.

Who knows exactly what that means… how it will be implemented… or what loan guidelines will look like for documenting it… the takeaway is this… with the January 2021 deadline approaching, the CFPB is going to find a way to prevent the mortgage/housing industry from being impacted by the implementation of a hard cap of 43% on the debt to income ratio.

Who knows what the final result will be, but it appears we are going to get some sort of change to keep the industry going. If nothing else, perhaps a several year extension of the QM Patch. The last thing anyone wants right now is the slowing of the housing market during a recession!

Proposed change to Qualified Mortgages

February 12, 2020

<<<For the history of Qualified Mortgages, see last week’s post.>>>

With 2021 right around the corner and no changes to Qualified Mortgages, the 43% maximum debt to income ratio cap is coming soon as the QM Patch provision is running out. The Consumer Financial Protection Bureau (CFPB) doesn’t want this to happen. What to do?

The CFPB definitely wants to keep Qualified Mortgages. The issue with the 43% debt to income cap is qualifying for a home. It is no secret housing values are continuing to rise – especially in metro areas. Also, student loan debt climbed unexpectedly since 2014. In fact, student loan debt is roughly 33% higher today than it was in 2014 (in terms of outstanding student loan debt).

Forcing the debt to income ration max to 43% (down from 50% on Conventional loans and 55% on FHA loans) would drastically impact those looking to qualify for a home loan. This is especially true of Millennials who carry the vast majority of the student loan debt.

To prevent this, the CFPB is proposing to eliminate the 43% hard cap requirement as they feel other measures can be introduced to take its place. The CFPB also proposes an extension to the QM Patch until the new provision gets implemented.

In other words, the CFPB agrees QM loans have been a good thing for the housing industry while also ensuring financially responsible loans that consumers must document they have the ability to repay. With foreclosure rates at a fraction of what they were during the crash and lower today than when QM loans were introduced, it is hard to argue.

As of this post, there is not a firm next step for the QM Patch expiration and the 43% debt to income ratio implementation. It is still set to start in 2021. This said, with the CFPB already proposing changes, it seems something will happen to ensure no harmful impacts happen to those looking to purchase a home.

Still concerned about the QM Patch expiring and how it could impact your ability to purchase a home? Contact me today. I’ll be happy to walk with you through the journey. If you are buying a home in the state of Georgia, I’m even happier to help you with the purchase!

Qualified Mortgages

January 21, 2014

blog-author-clayjeffreys3

There has been a lot of news coverage lately on Qualified Mortgages now that the rule has taken hold in the mortgage industry. What is a Qualified Mortgage and how does it impact the mortgage industry?

It is a great question and one that has been hotly debated as of late. Instead of getting into all of the minutia, let’s peer through the matrix and simplify the term Qualified Mortgage.

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In short, a Qualified Mortgage is a mortgage that does not have excessive upfront points and fees, no “toxic” loan features (such as interest only, negative amortization, prepayment penalties, and balloon payments), and a capped debt to income ratio of 43%.

What does that mean? Let’s look at each part:

1. There is now a cap on all lender fees to keep customers from being charged with excessive fees.

2. Over the past several years, negative amortization loans, prepayment penalties, and balloon payments have essentially disappeared from the mortgage industry. Interest only loans did exist, but a buyer needs at least a 30% down payment in order to use an interest only product. In other words, these “toxic” loan features are, for now, already out of the mortgage industry.

3. While the debt to income ratio cannot exceed 43%, there is a temporary exception in place until January 2021 for all loans that are eligible to be sold to Fannie Mae, Freddie Mac, FHA and VA. If the loan being used to buy a home is eligible to be sold to Fannie Mae, Freddie Mac, FHA or the VA, then the debt to income ratio can exceed 43% just as it was allowed prior to Qualified Mortgage rule taking over the mortgage industry. Given the amount of changes in the mortgage industry over the past few years, a 7 year exception might as well be a 700 year exception. By the time 2021 rolls around, odds are there will be another set of rules that has replaced or modified the Qualified Mortgage rule.

How does this impact those looking to buy a home? In all honesty, it really doesn’t. The part most people are concerned about is the cap of 43% on the debt to income ratio, but doesn’t come in to play unless the loan isn’t eligible to be sold to Fannie Mae, Freddie Mac, FHA or the VA. Considering there are VERY few loans  available that are not eligible to be sold to these institutions, the 43% cap on the debt to income ratio won’t impact many home buyers in the near future.

When you are out looking to buy a home this year, don’t worry about any of the “the end is near” stories you are hearing about Qualified Mortgages preventing you from buying a home. Work with a professional who is up to speed on the changes and can guide you through the loan process into your new home. If you are buying a home in the state of Georgia, contact me. I can help you get prequalified and start the home buying process today.

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