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Understanding the Changes in the Down Payment Rule

Beginning January 2014, the requirements and regulations of the Dodd-Frank Act will be enforced by the Consumer Financial Protection Bureau (CFPB). There are two sets of rules that will be put into place for regulating mortgage lending: the Qualified Mortgage (QM) rule and the Qualified Residential Mortgage (QRM) rule.

The QM rule – effective on January 10, 2014 – is designed to assure that borrowers have the ability to repay their loans, reducing the lender’s risk. The QRM rule – still proposed with final rule pending and effective date not yet determined – establishes standards and requirements for loans to ensure the originating lenders hold part of the risk for loans that do not meet certain criteria.

Both rules were created and intended to prevent a future housing market meltdown. While neither rule specifically bans mortgages with less than 20 percent down, many lenders will take a conservative approach to lending upon implementation of these stricter requirements in an effort to protect both themselves and the borrower.

The government loan programs of FHA and VA loans will continue to operate with a standard of 3.5 percent down payment and zero percent down, respectively.

The QM rule provides very clear guidelines for lenders on how the borrower’s ability to repay the loan must be verified with documentation concerning the borrower’s financial position. Therefore, in order to meet the requirements of these new regulations, lenders will now review a borrower’s entire financial picture prior to making a lending decision, which may seem invasive and excessive in the eyes of many consumers. Provisions require that a borrower’s total debt payment cannot exceed 43 percent of their pretax income. In addition, lenders will require documentation supporting a borrower’s credit history, proof of at least two years of stable employment, and assets along with collateral and down payment potential in their financial lending decision.

There is a temporary exemption from the 43 percent debt-to-income ratio, where the borrower’s loan application receives approval from Fannie Mae or Freddie Mac automated underwriting systems for a period of seven years or the end of these agencies’ conservatorship, whichever comes first. In addition, loan applications approved through the FHA and VA programs have the same temporary exemptions from this debt-to-income ceiling.

Creating and establishing rules which protect the future of the housing industry and the home mortgage consumer is an arduous task requiring significant input from policymakers, industry leaders and consumer advocates. These initial steps toward qualified lending requirements are just the first effort in creating a system that supports first-time home borrowers, while still protecting lenders and other homeowners from overextending themselves and sending the economy back into a state of chaos.

 
Marcus McCue | EVP & CBDO
Guardian Mortgage Company

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Monday, 23 December 2013