The definition of what makes a Qualified Residential Mortgage (also known as a QRM) will be changed drastically under the new mortgage reforms. During the past few years the housing market has been in a state of perpetual crisis. Part of the reason why the housing market is in shambles is due to the fact that many buyers were not adequately qualified for their loans and as a result were unable to pay off their mortgages. The federal government is addressing the situation by proposing stricter regulations which will ensure that buyers will actually be able to afford their homes. These laws will go into effect in 2012 and will decrease the number of “high-risk” mortgages.
The debt-to-income ratio will be a lot more conservative and stringent. An individual’s monthly mortgage payment will not be able to exceed 28 percent of their total income. This is to ensure that families will not have significant hardship making their payments. During the past few years, agencies such as Freddie Mac and Fannie Mae have much lenient guidelines but not anymore. In the past it was also possible for consumers to obtain pretty good rates with less than 20% down payment. The new regulations will make that impossible. Federal agencies are hoping that the stricter regulations will decrease the number of “high-risk” mortgages which resulted in the current housing turmoil.
The government will also change the loan amounts they are willing to back up. It is currently set at $729,750 but will be scaled down to $625,500. Loans over $625,500 will be counted as high risk and require an even larger down payment of around thirty percent The burden is currently on tax payers if home loans go into a default status and federal agencies want to lessen that burden by minimizing its current role in the housing market. As a result Fannie Mae and Freddie Mac will be slowly phased out and loans will be increasingly backed up by private banks and institutions. Eight bills have been created which will significantly lessen the influence of Fannie Mae and Freddie Mac.
A 60 day late payment within the last two years will also disqualify consumers from obtaining premium rates. Grade A credit scores will be more important than ever. Additional changes will also go into effect in regards to the refinancing process. Consumers will need at least 25% equity in order to qualify for optimum interest rates. This is a lot more conservative than current refinancing practices.
Loans which do not meet these strict guidelines will require banks to set aside at least five percent in case they go into default or foreclosure. These regulations will make it very difficult for many Americans to become homeowners and is expected to increase the number of renters. Many first time and lower income families will not be able to purchase a home due to the higher interest rates and larger down payments. Even though interest rates are currently low, many individuals will still not be able to take advantage of them because they won’t qualify for a loan.
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