Reader question: “I’ve been reading up on the new lending rules that took effect in January 2014. It seems like these rules will make the mortgage underwriting process much harder for borrowers — unless I’m misinterpreting them. Will underwriters be more strict in 2014, in order to comply with these changes? How will the rules ‘trickle down’ to affect home buyers like myself?”
In 2014, the mortgage underwriting process for home loans became more standardized. A new federal rule which took effect in January requires lenders to make a “good-faith determination” that the borrower has the financial means necessary to repay the loan. They must do this by evaluating eight specific underwriting factors, as outlined by the Consumer Financial Protection Bureau.
While they are hardly groundbreaking, the new underwriting rules could create more uniformity across the industry. Here’s a bit of background on these changes.
Ability to Repay Rule Standardizes Underwriting Procedures
In January 2014, the Consumer Financial Protection Bureau (CFPB) enacted some new rules and requirements for mortgage underwriting in the United States. They are now known as the Qualified Mortgage (QM) and the Ability-to-Repay rules.
In a sense, there is nothing “new” about these newly published underwriting standards. Most lenders were already evaluating these checkpoints, long before the new rule came along to mandate it. Standardization is the big story. As a result of these new requirements, the underwriting process for home loans will be more standardized in 2014 and beyond. That is what makes them noteworthy.
It’s too soon to say whether the underwriter process for borrowers will be stricter, less strict, or unchanged in 2014. Typically, those kinds of trends are measured in hindsight based on data collection and trend analysis. So we wouldn’t see that kind of reporting for some time.
Here is a summary of the “new” underwriting standards for 2014, as outlined in the federal government’s Ability-to-Repay (ATR) rule.
Key Factors: Income, Assets, Debts and Employment
The ATR underwriting requirements focus on four key areas — income, assets, recurring debts, and employment status. In cases where the borrower has sufficient non-employment income to qualify for the loan, employment status becomes less of a concern. In such cases, income, assets and debt will be the primary focus.
Specifically, lenders must review the borrower’s income and assets against:
- The monthly mortgage payment
- Other recurring expenses related to the mortgage (property taxes, home insurance)
- Payments on other loans secured by the property (i.e., second mortgages)
- Other recurring debts, including alimony and child-support payments when applicable
Additionally, the ATR rule provides a list of eight underwriting requirements. Lenders must examine the following factors when considering borrowers: (1) current or expected income and assets; (2) current employment status; (3) monthly payments on the loan; (4) monthly payments on second mortgage if applicable; (5) monthly payments for other mortgage-related obligations; (6) other recurring debt obligations, alimony and child support; (7) monthly debt-to-income ratios or residual income; and (8) the borrower’s credit history.
This is basically what lenders have been looking at all along, at least since they tightened up on their lending practices in the wake of the housing collapse. The Consumer Financial Protection Bureau, which created the specifics of the ATR rule, has failed to provide any specific instructions on the “new” underwriting standards for 2014. So much of it will be left up to the individual lenders, and their own common sense.
The bottom line is that the overall home-loan approval process could take longer in 2014, as a result of these newly enforced documentation and verification procedures. Lenders have to check and double-check that they are meeting all of the government-imposed criteria. But I don’t necessarily think that will make underwriting any harder in 2014. Slower? Probably. But harder? I don’t see it happening.
Brandon Cornett
Brandon Cornett is a veteran real estate market analyst, reporter, and creator of the Home Buying Institute. He has been covering the U.S. real estate market for more than 15 years. About the author