Congress enacted the Dodd-Frank Act in 2010 in response to the mortgage crisis that led to America's Great Recession. The two parts that apply closely to homebuyers are the Ability-to-Repay (ATR) and Qualified Mortgages (QM).
A Qualified Mortgage is a category of loans that have certain, more stable features that help make it more likely that borrowers will be able to afford their loan. These loans do not allow certain risky features like an interest-only period when no money is applied to reduce the principal; negative amortization that would allow the mortgage balance to increase; and, "balloon payments" at the end of the loan that are larger than the normal periodic payments.
A debt-to-income ratio of less than or equal to 43% has been established to provide a limit on how much of a borrower's income can go toward total debt including the mortgage and all other monthly debt payments. However, the Consumer Finance Protection Bureau believes these loans should be evaluated on a case-by-case basis and in some cases, can exceed 43%.
There is a limit for up-front points and fees the lender can charge.
By showing that the lender made an effort to be certain that the borrower has the ability to repay the loan, the lender in turn, receives certain legal protections. Underwriting factors considered by the lender include:
- current or reasonably expected income or assets
- current employment status
- the monthly payment on the covered transaction
- the monthly payment on any simultaneous loan
- the monthly payment for mortgage-related obligations
- current debt obligations, alimony, and child support
- the monthly debt-to-income ratio or residual income
- credit history
For more information, see the Consumer Financial Protection Bureau fact sheet ... protecting consumers from irresponsible mortgage lending.