Mortgage Lenders Are Now Prohibited from Lending more than Buyers can Afford
New Rules from the Consumer Finance Protection Bureau have been issued to prevent some of the abuses that created the housing crisis. The rules, which can be seen here, will require banks issuing mortgage loans to verify a borrower’s income – through pay stubs or tax returns or other documentation – before issuing a loan. This is likely to create more paperwork for borrowers and lenders, but since a mortgage already requires a ton of paperwork, what is a few sheets of paper extra? The more important aspect of the rule is that the banks are not allowed to issue a loan whose monthly payment amounts to more than 43% of a borrower’s income – this includes taxes, insurance, and other loans that are may be bundled with the mortgage payment. To illustrate how this differs from the old system that created economic calamity, during the housing bubble, banks routinely made loans that required over 50% of a borrower’s income, just to cover principal and interest.
Banks get a break, too, because if they comply with the rules, they are immune to certain lawsuits that consumers can bring for violations of ‘ability-to-repay’ laws. This rule has been welcomed by the finance industry because it frees them from liability for a lot of past bad behavior, and hopefully it will enable more home buyers to have access to credit for new purchases at today’s historically low interest rates.