Regardless of whether you blame Wall Street traders, financially illiterate homebuyers, or greedy mortgage lenders for the housing boom — and subsequent bust — the number of homeowners who can’t afford their homes is staggering.
According to RealtyTrac Vice President Darren Blomquist, at least 10.9 million homeowners are “seriously underwater” on their mortgages in January 2013.
In mid-January, the Consumer Financial Protection Bureau announced new mortgage rules intended to protect mortgage borrowers from predatory lenders (and themselves). Though the regulations won’t take hold until Jan. 10, 2014, they will change the experience of having a mortgage — and potentially, if you’ll be approved for one.
Here are some of the major changes you’ll see to the mortgage lending process and mortgage rules in 2014.
If you’ve already got a mortgage, your lender must:
Be clear about where your money goes
Credit card holders have seen greater transparency, like how long it will take to pay down a balance, in their monthly statements for a couple of years, and as of January 2014, mortgage statements will follow suit, according to the new mortgage rules.
Among the changes, mortgage lenders must provide a monthly billing statement that clearly indicates which aspect of the monthly payment went to escrow and principal (if any), the balance owed, and any service or transactional fees paid. (For those with a fixed rate mortgage and monthly payment book, it can serve as the statement, with some additional detail reflected).
When you make monthly or additional payments, the lender must credit the amount to your account the day funds are received, and respond to your inquiries about paying the loan off within seven days of receiving correspondence, the mortgage rules say.
If you write your mortgage lender with a question or concern about your account, they must acknowledge your correspondence within five days. From that time, they have 45 days to address the issue and inform you of the outcome.
Tell you of interest rate changes
Under the new mortgage rules, credit card issuers must notify you by mail if your interest rate is increasing, at which point you have the option to accept or reject the new card agreement terms.
ARM (adjustable rate mortgage) loans are held to similar standards: Lenders must notify consumers with ARM loans of an increased rate 210 and 240 days prior to the first payment due date, and the notice may provide detail about the payment amount under the new rate.
An additional notice must follow 60 to 120 days before the new payment amount due date. (Unlike a credit card, you cannot reject the new interest rate, because you already agreed to it, by way of taking on an ARM loan).
Intervene if you’re missing payments
Under the current foreclosure process, lenders have no obligation to respond to homeowner requests for lower monthly payments. Blomquist estimates that 414 days is the average amount of time it takes to reach foreclosure resolution.
[pull_quote align=”left”]Beginning in 2014 with the new mortgage rules, mortgage lenders are required to attempt contact with homeowners within 36 days of a missed payment[/pull_quote]Beginning in 2014 with the new mortgage rules, mortgage lenders are required to attempt contact with homeowners within 36 days of a missed payment, and provide any loan workout options that may be available no later than 45 days after the missed due date.
At that time, they must also connect consumers with a customer service point of contact. If the homeowner wishes to pursue loan workout options, the lender must provide information on how to apply for possible assistance.
Though the lender does not have to agree to a workout agreement, they must respond with the decision within 30 days. If a homeowner fails to apply for potential workout options, the lender can pursue the foreclosure once payment has been late for 120 days.
If you’re a homebuyer, or refinancing a mortgage loan:
Risky features and teaser rates are regulated
Under the new 2014 mortgage rules, lenders are assumed to provide what the CFPB calls a “qualified mortgage.”
By definition, lenders must: Limit points and fees to no more than 3% of the loan amount, not offer risky loans with terms that extend beyond 30 years, promote “teaser rates” that are interest only, or are based on similar risky terms like negative amoritization schedules that eventually lead to significantly higher monthly payments.
Debt to income ratio is critical
Though having a down payment and positive credit history will still be a key aspect to securing the historically low mortgage interest rates advertised, beginning in January of next year under the new mortgage rules, your debt to income ratio is the deciding factor as to whether you’ll be approved for a mortgage or refinance.
By law, the new mortgage rules require that lenders ensure that you are financially able to make your mortgage payments and it’s all based on keeping your housing costs reasonable in relation to your income, and other debt obligations.
Under the new “Ability-to-Pay Rule,” borrowers cannot exceed a 43% debt to income ratio, which is your total monthly debt divided by your total monthly gross (before tax) income.
For a person or family with an $80,000 a year salary, monthly debt shouldn’t exceed about $2,800. Further, borrowers must prove financial standing, with current paycheck stubs, credit history, employment status, bank statements, and proof of other assets.