One of the first questions every homebuyer needs to ask is: How much can I afford for a monthly payment? That's also a question your lender needs to ask. One of the primary causes of the recent financial crisis was that too many lenders and borrowers didn’t ask, or answer that question. The Consumer Protection Act was passed to provide guidelines that will help ensure you have the ability to repay your mortgage. So, we'll work together to understand your financial situation and determine what you can afford. Under the Ability-to-Repay rules, you will need to provide certain documents that help us, as a lender, to understand your finances. For example, we will need to see W-2s or pay stubs to verify your income. There are eight pieces of information every lender needs to consider before approving your mortgage: 1. Your current income or assets. 2. Your current employment status. 3. Your credit history. 4. The monthly payment for the mortgage. 5. The monthly payments on other mortgage-related loans you get at the same time. 6. Your payments for other mortgage-related expenses like property taxes. 7. Other debts you may have. 8. Your “debt-to-income ratio” which compares what you owe overall to the income you have to repay that debt, leaving enough additional funds for essentials like food, utilities, etc. All of this information - combined - allows us to determine whether you can repay the mortgage. Every lender should look at your debt-to-income ratio, which indicates the amount of money you’ll have left over each month to pay for essentials like food and heat. We also need to make sure we don't base your qualification solely on initial low interest payments. If we are considering an adjustable mortgage, we have to factor in potentially higher payments down the road. Our goal, just like yours, is to end up with a “Quality Mortgage” - one that you can repay, comfortably. Certain mortgage features that were offered in the past actually harmed consumers and helped lead us into the financial crisis. Lenders must avoid offering:
- Promotional features such as “Interest-only” periods, when a consumer pays only the interest without paying down the principal.
- “Negative amortization,” which is a mortgage where the loan principal increases over time, even though you are making payments.
- “Balloon payments,” which are larger than usual payments at the end of the loan term, can only now be offered under very limited circumstances.
- Terms longer than 30 years are no longer allowed.
Finally, to meet the requirements for a “Quality Mortgage,” your monthly debt (including the mortgage) should not be more than 43 percent of your monthly pre-tax income. There are also limits on the amount of upfront points and fees that the consumer can be charged, depending on the size of the loan. We will make sure everything is clear to you before you sign papers. Buying a home - and taking on the responsibility of a mortgage - is one of the most important things you'll ever do. Let's work together to ensure that it's a “Quality Mortgage” - one that you have the “Ability to Repay.”
