Ability-to-Repay rule implemented

by Shea Homes on January 10, 2013

Defaulting on your mortgage payments might now be a thing of the past for many Americans, as the Consumer Financial Protection Bureau recently passed a rule that could help many potential homeowners avoid getting a new home and not being able to pay the mortgage.

The CFPB recently passed the Ability-to-Repay rule, which could prevent  many Americans from obtaining loans from lenders who avoid requesting their personal financial information. Risky lending practices and loans, such as No Doc and Interest Only, are thought to have played a significant role in the 2008 housing collapse, which left many Americans in difficult financial situations.

Requirements of Ability-to-Repay rule
The Ability-to-Repay rule requires all new mortgages comply with a few basic requirements that protect consumers from securing loans that could be more than they can handle. One of the requirements implemented is that lenders must receive financial information from borrowers and also have that documentation verified.

“When consumers sit down at the closing table, they shouldn’t be set up to fail with mortgages they can’t afford,” said CFPB Director Richard Cordray. “Our Ability-to-Repay rule protects borrowers from the kinds of risky lending practices that resulted in so many families losing their homes. This common-sense rule ensures responsible borrowers get responsible loans.”

Another requirement of the Ability-to-Repay rule is that a borrower has to prove they have sufficient assets or income to pay back the loan lenders grant. One of the most common ways lenders might do this is to calculate the borrower's debt-to-income ratio, taking their total debt and dividing it by their total monthly gross income. Calculating the debt-to-income ratio can give lenders a more accurate picture of whether the borrower will be able to pay back their loan or not.

With the new practices being implemented, foreclosures might continue decreasing as they did in November. According to CoreLogic's latest National Foreclosure Report, there were 55,000 completed foreclosures in November, which was a 23 percent decrease from the same time in the previous year. Americans who were looking to have a new house built by Shea Homes might consider now to be a great time since the housing market is showing more signs of recovery.

"The continued fall in completed foreclosures is a positive supply-side contribution in many regions of the U.S.," said Anand Nallathambi, president and CEO of CoreLogic. "We still have a long way to go to return to historic norms, but this trend is firmly in the right direction."

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