New mortgage lending rules go into effect this month

Beginning in January, new mortgage rules from the federal Consumer Financial Protection Bureau (CFPB) will go into effect.  The rule changes are designed to prevent the kind of mortgage loan excesses that led to millions of homeowners facing foreclosure during the recent downturn.  In addition, the new rules set the FHA guarantee cap at $625,500.

The CFPB’s rules make stricter lending practices official; however, most lenders have already tightened home loan practices to reflect what a borrower is actually qualified to borrow, therefore, the rules may not change the day-to-day lending practices which are already common.

The rules, which come from CFPB, will go into effect Jan. 10 and include these provisions:

• Lenders must base their lending decisions on borrowers’ ability to repay their mortgages.
• Lenders can’t write mortgages if the borrowers’ monthly debt payments (including the mortgage, car loans and other debt) exceed 43% of their income.
• Mortgage fees cannot exceed 3% of the loan amount.  And loans can’t include high risk characteristics such as payments that cover only the interest on a loan.
• Mortgage brokers can’t receive higher fees for recommending loans that cost the consumer more.
• Mortgage servicers cannot begin the foreclosure process until a borrower is more than 120 days delinquent.  If the homeowner is working with the lender to modify a loan to make it more affordable, the foreclosure process can’t start.

In addition to these rules, the Federal Housing Administration will no longer guarantee loans for more than $625,500.  This is down from the previous $729,750.  This change has the highest impact on higher-cost areas.  Fannie Mae and Freddie Mac, the large mortgage finance companies, have already dropped their loan guarantee ceilings to $625,500.

The FHA change means that buyers of homes that cost more than $625,500 will not be able to get FHA loans, which provide for down payments as low as 3.5%.  Instead, borrowers have to apply for jumbo loans, which usually require down payments of at least 20%.  Since few buyers of expensive homes choose FHA loans, the new FHA guidelines may have less effect on the luxury home market than on average properties.  Nonetheless, you should be aware of the impact these changes may have on the luxury market segment.