A new era for the mortgage industry is about to begin. From the ashes of the 2008 financial crisis came a host of new rules and regulations meant to better safeguard homebuyers and minimize risky loans. There’s a new class of loans (called Qualified Mortgages, or QM) and a new regulatory body to oversee the industry (the Consumer Financial Protection Bureau, or CFPB).
Mortgage industry folks have been preparing for these changes for a while, but news is just now starting to sink in among prospective homebuyers. A lot of confusion and uncertainty has followed. Service members, veterans and military families across the country are starting to worry about how these changes and this new classification of mortgages might impact their ability to use their VA loan benefits.
Here’s the good news: You have nothing to worry about.
The VA loan program has been a model of safety and stability for decades. Most reputable lenders, including Veterans United, have been employing for years the kind of credit and underwriting requirements set forth by the CFPB. The bottom line is VA borrowers shouldn’t expect to see any negative impacts or limitations because of these changes.
Explaining Qualified Mortgages
The new class of mortgages is all about safety and affordability, two long-time hallmarks of this 70-year-old VA loan program. Throughout the 2000s, some lenders made a ton of money providing home loans to people with poor credit and no realistic chance of repaying the loan. Those subprime loans played a major role in the financial crisis and ensuing collapse of the housing market.
In the aftermath, Congress sought a way to protect consumers and the economy at large. One of the results was the creation of a new classification of mortgages, known as Qualified Mortgages (QM). These loans are devoid of riskier features and meet a set of requirements aimed at ensuring the borrower can afford the loan they’re getting. Mortgages that meet the QM requirement will also help shield lenders from claims that they put a borrower into a bad loan all but destined for default.
Qualified Mortgages, by definition, can’t include any of the following:
- A period where the borrower pays only interest on the loan and nothing toward the principal, known as an interest-only loan
- Something known as “negative amortization,” which occurs when your payment fails to cover all of the interest due, leading your principal balance to actually increase over time
- Balloon payments, where you’re required to pay off the loan in one lump sum payment after a certain number of years
- Loan terms beyond 30 years
In addition, regulators laid out a set of eight credit and underwriting requirements that must be met in order for a loan to obtain Qualified Mortgage status. These requirements are the heart of what’s called the Ability to Repay (ATR) rule. Most lenders have been using some or all of these requirements for a long time.
Ability to Repay rule
The Ability to Repay’s eight financial metrics are:
- Current income or assets
- Current employment status
- Credit history
- Monthly mortgage payment
- Monthly payments on other mortgages
- Monthly payments for mortgage-related expenses, such as property taxes
- Current debt obligations, including things like child support or alimony
- Your monthly debt-to-income (DTI) ratio
These are common sense requirements that reputable lenders have employed for a long time. Veterans United has utilized these eight requirements for years, long before a legislative call to make them mandatory. Thoroughly documenting all eight of these is one of the pillars of a Qualified Mortgage, along with the absence of the risky features mentioned above.
There are a handful of other requirements in order for a loan to be considered QM. In most cases, costs and fees can’t exceed 3 percent of the loan amount. There’s also a maximum DTI ratio, but for most loans — including those backed by the Department of Veterans Affairs — this cap won’t be part of the equation, at least anytime soon. Loans that already qualify for purchase or guaranty by a government entity (Fannie Mae, Freddie Mac, FHA, VA, etc.) are presumed to be Qualified Mortgages.
So, to take a step back, here’s a look at what makes a Qualified Mortgage:
- Has no toxic features
- Meets the Ability to Repay requirements
- Has appropriate costs and fees
Affect on VA Loans
Given that background, the question is: What’s it all mean for VA home loans and military borrowers?
There really shouldn’t be much impact. This kind of safe, prudent underwriting has been part of the VA program for years, and it shows: VA loans have had the lowest foreclosure rate of any loan on the market for nearly all of the last five years. The financial requirements you need to meet for most VA lenders won’t change, because they’re already taking a long, hard look at all eight of those Ability to Repay requirements.
Borrowers will get some added protections. Many lenders that weren’t already using these requirements will likely adopt the safer course. There will also be limits on the costs and fees associated with obtaining a mortgage. The VA is expected to release guidance on its own QM rules sometime in early 2014.
How these changes will affect the mortgage industry as a whole remain unclear. The Consumer Financial Protection Bureau estimates that 92 percent of loans currently originated already meet Qualified Mortgage requirements. The remaining 8 percent likely either exceed the standard for costs and fees or have higher annual percentage rates (APR) than allowed. So the vast majority of home loans aren’t likely to feel much impact, if any.
VA borrowers will still have access to the incredible homebuying benefits earned through service and sacrifice. If anything, the rest of the mortgage industry should give this program and its borrowers a word of thanks for leading the way.