Beginning January 10, 2014, a ruling required under the Dodd-Frank Wall Street Reform and Consumer Protection Act called the Qualified Mortgage (QM) and Ability- to-Repay (ATR) will take effect. The rules here finalized by the Consumer Financial Protection Bureau (CFPB) and are designed to prevent the types of high-risk loan features that here commonly used during the housing boom. For example, Lenders will no longer be allowed to offer interest-only loans or balloon payments which could put the borrower at risk of foreclosure in the future. Lenders will be limited to the amount of fees they can charge and will have a duty to disclosure facts about the loan in redesigned, easy-to-understand forms. Borrowers must be given copies of their final closing statement 3 days prior to closing rather than the previous one-day rule. The far-retching effects of these new rules will undoubtedly change borrowing criteria, often making it more difficult, and time-consuming, to quality for a mortgage. To review, new law changes include:
- Balloon payments and negative amortization will not be allowed
- The debt-to-income ratio limit will change from 36% to 43%
- New mortgage rules to qualify borrowers (borrower’s ability to repay loan)
- Lenders cannot charge more than 3% of the loan amount for points and fees
- Loan terms will be limited to 30 years maximum
- Borrowers must be given closing mortgage disclosure 3 days before closing
Qualifying for a loan will require more documents such as bank statements, pay stubs, tax returns, W-2s and job stability proof. Under the Ability-to-Repay rule, lenders must determine the consumer’s ability to pay back both the principal and the interest over the long term, not just during an introductory period when the rate may be lower. Lenders can no longer offer no-doc, low-doc loans.
Be prepared to prove:
- Current income and assets
- Current employment status
- Credit history – any problems in the report
- Monthly payment for your existing mortgage
- Monthly payments on any other loans associated with the property
- Associated expenses such as property taxes you now pay
- Any other debt obligations
Borrowers with minimal debt may not see much change from last year’s requirements to obtain a mortgage, but borrowers who do not reach the 43% debt-to-income limit may need to look at ways to reduce their other debts, such as credit cards.
On the positive side, since the new loan criteria are intended to force lenders to offer “safer” loans for consumers, theoretically cutting down on the number of foreclosures as borrowers are not tied into loans they really couldn’t afford. There are new rules for companies which service your mortgage. A loan servicer is the company which handles the collection of payments on your mortgage. They must send you a monthly statement and credit your payments on the day they are received. If you fall behind on your payments, the servicer must:
- Contact the borrower if the payment is 36 days late
- May not start a foreclosure until the borrower is 120 days delinquent
- The borrower must be given time to submit an application for a loan modification or other assistance or to prepare an appeal against a decision which goes against them
- The borrower must be sent an advance notice if the interest rate on an ARM is about to change
If the loan servicer is not complying with the new rules, you can complain to the Consumer Financial Protection Bureau at www.consumerfinance.gov/complaint or call 888-995-4673.
Attorneys handle closings. Although quitclaim and general warranty deeds are sometimes used, most conveyances are by special warranty deeds. Mortgages are the security instruments. Foreclosures are judicial and require 90-120 days to complete. ALTA policies and endorsements are prevalent. Buyers pay closing costs and the owner’s title insurance premiums. Buyers and sellers share the state transfer tax. Property taxes are on an annual basis and vary by county.
Title companies, real estate agents, and approved attorneys may handle closings. Conveyance is by special or general warranty deed. Mortgages are the security instruments. Foreclosures take 1-6 months from filing through judgment plus another 2 months or more from judgment through sale. State law restricts aliens in owning real property with respect to acreage and income and includes special restrictions affecting farmland. Pennsylvanians use ALTA owner’s, lender’s, and leasehold policies. Buyers pay closing costs and title insurance fees; buyers and sellers split the transfer taxes. Property tax payment dates differ across the state.
Attorneys conduct closings, and there has to be a local attorney involved. Conveyance is by grant deed, and the deed must state the consideration involved. Although mortgages are common in some areas, deeds of trust are more prevalent as security instruments. Security instruments may include a private power of sale, so it naturally is the foreclosure method of choice. Marylanders use ALTA policies and endorsements. Buyers pay closing costs, title insurance premiums, and transfer taxes. Property taxes are due annually on July 1st. Police officers in Prince George’s County who are first-time home buyers get a break on their transfer taxes at closing under a law that took effect July 1, 2006. Officers pay 1 percent of the purchase price rather than 14%, the regular rate. County school teachers here made eligible for the same tax break in an earlier law without the first-time buyer limitation. Teachers must commit to living in the house for at least three years and maintain their teaching position with the county during that time.