There has been so much speculation into what the new Qualified Mortgage-Ability to Repay (QM-ATR) rules will bring to our industry. Predictions ran the gamut, from “this will crush our business” to “this is no big deal” and everything in between. We are now a little more than two weeks into the new guidance, & as is often the case, the practical truth seems to lie somewhere in the middle. Granted, this is all still very new from an operational standpoint, but here are some things that we can put in the “truth” column, when evaluating “truth vs. myth”.
- Borrowers will want to be prepared to clearly document ALL sources of income for the past two years. In addition to base pay, lenders will seek to document overtime pay, bonuses, child support, disability benefits, etc. In the past, a lender might choose to disregard a certain income stream if they concluded that the base pay was sufficient. Lenders may now want to document this additional income to protect themselves against any future QM-ATR challenges.
- There has not been an inherent change in the amount of income required to qualify for a certain size of mortgage. So in other words, although the documentation requirements have become more stringent with the onset of QM-ATR, the mathematical qualifying has not really been modified. If you qualified for a $150,000 mortgage prior to QM-ATR requirements, chances are you still will. Some obvious caveats here; rate changes will impact how much one can qualify for. Certain loan products such as jumbo loans will adhere to a firm 43% total debt load to keep the loan within QM-ATR guidelines. Lastly, if your previous qualification was based on an income stream that is tricky to document or not consistent, then the amount that you would qualify for could change.
- Certain transaction combinations, although rare, will be hard to complete while still staying within the rate & cost guardrails that the QM-ATR impose. As an example, very small mortgage amounts, or financing a modest rental property may result in a rate & fee configuration that does not meet QM-ATR guidelines. Definitely one more reason to meet with your lender early in the home buying process!
- Although lenders will be adamant about documenting a two year work history, job changes in of themselves do not automatically create a problem. The language in the QM-ATR guidance is clear that income consistency is more critical than length of time on a job.
To quote our Chief Compliance Officer, “the situation remains fluid”. Keep in mind that the oversight for QM-ATR is handled by the relatively new regulatory entity, the “Consumer Financial Protection Bureau” (CFPB). As with anything that is untested, it will take some time to see where all of the practical limits land. In the mean time, most potential homebuyers should not fear this new guidance. As said earlier, meet with your lender early, and have your financial paperwork in order. In closing, the key to a smooth loan process for 2014: clear documentation of consistent income.
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