In the run-up to the housing crisis, some lenders made loans without checking a borrower’s income, assets, or debts. That turned out to be a pretty bad idea. And, when many borrowers couldn’t repay their loans, the economy was hurt badly.
Our new mortgage rules help change that. They’ll help protect you by requiring your lender to make a “good-faith, reasonable effort” to determine that you are likely to be able to repay your loan. That means the lender will check and verify your income, assets, debts, credit history, and other important financial information. And no more qualifying you based only on those initial “teaser” rates that trapped some consumers.
Lenders who meet certain requirements for what we call Qualified Mortgages–or QMs– are presumed to have made that good-faith, reasonable effort to check your ability to repay. QMs have several characteristics that protect consumers. First, QMs can’t have risky features like negative amortization or no-interest periods. Second, QMs are available with some exceptions to borrowers who have a monthly debt-to-income ratio of 43 percent or less, meaning that the total of their monthly mortgage payment, plus other fixed debts like car loans, is not more than 43 percent of their monthly gross income. Most people taking out a mortgage now have a debt-to-income ratio of around 38 percent.
You’ll also have less to worry about when you hire someone to help you find a mortgage. Loan officers and mortgage brokers have to follow rules to protect you from certain conflicts of interest. That means anyone you pay to help you find a mortgage generally can’t also be paid by someone else. And your loan officer or mortgage broker can’t get paid more to put you into a loan that has a higher interest rate.
The new rules empower you to get important information about your mortgage. You’ll get a new periodic mortgage statement or coupon book that gives you important information about your monthly payment in one place. If you have questions about your mortgage or you think your servicer has made a mistake, the servicer is required to respond to your written inquiries quickly.
If your financial situation changes and you are having trouble making your mortgage payments, servicers now have to reach out under certain circumstances and send written information describing how you can apply for the options available to avoid foreclosure. During the housing crisis, mortgage servicers were often ill-prepared to help borrowers in trouble. Important paperwork was often lost and borrowers were frustrated by servicers who couldn’t give them accurate information about their options for avoiding foreclosure. Now your servicer has to ensure that employees assigned to help you will be able to answer your questions and important documents won’t go missing.
You can think of all these changes as a “back to basics” moment for the mortgage market: No debt traps, surprises, or runarounds. And a market where, if you run into trouble paying your mortgage, you’ll have a fair shot at all the options available to help you avoid foreclosure.
To learn more about our work on mortgages, check out consumerfinance.gov/mortgage.