Many Minnesota lenders are taking a conservative approach by choosing, at least for now, to purchase only full documentation loans. Others are stating that "no income, verified assets" will be acceptable. However, all lenders are wanting to see that we have established a borrower's "reasonable ability to repay the loan."
As we move closer to the August 1 effective date, more investors are issuing statements describing their position on the effect of the legislation. While most of the focus is on stated income loans, the legislation also affects ARMS, Option ARMS, temporary buydowns, and interest-only programs.
Moving into the change, there is alot of confusion about what will work and what won't. We will be receiving clarification from lenders as we get closer.
How do we establish "reasonable ability to repay the loan?"
- Reserves - Are there substantial reserves sufficient to cover payments?
- Payment Shock - Is the new payment less than or equal to the previous payment, or doesn't represent a substanial increase?
- Debt consolidation - Is the borrower's overall debt payment reduced?
- Credit Score
- Job Stability
- Access to other "non-usable" sources of income that can be documented, but cannot be included in the file income: Non-purchasing spousal income, roommate income, etc....
Net Tangible Benefit
The new legislation als requires that, on a refinance, there is a Net Tangible Benefit to the borrower. There will be a Tangible Benefit Worksheet (Anti-Predatory Lending Disclosure) provided to determine the benefit of a refinance.
Other pieces of the new legislation:
- 5% limit on financed "lender fees" for non-FHA and VA loans to include fees paid by the Lender to the Broker, including yield spread premiums and service release premiums.
- Prohibits negative amortization features in residential mortgage loans other than Reverse Mortgages.
- ARMS must be underwritten at fully indexed rate (index plus margin). For Home Equity lines of credit, qualification will utilize the Prime Rate and the margin at the time the mortgage loan is underwritten with the borrower.
- All loans where there is an interest-only component must be underwritten using the full principal and interest payment.
- All loans with a temporary buydown feature must be underwritten at the note rate.
I'm sure there will be updates to this information as the law goes into effect. I'll keep my eye out and make sure to report on it as soon as I can.