QUESTION: My daughter and son-in-law are talking about buying a very expensive house. My son-in-law says that they are going to get a loan that will really stretch their finances for a few years but that their income will eventually catch up with the loan payment. I thought the days of potentially risky loans were over. Can they still get a loan without the bank checking their income and ability to pay?
ANSWER: The mortgage crisis of a few years ago has caused the government and lenders to change many of the guidelines and procedures of mortgage lending. In fact, new mortgage lending rules went into effect in January 2014. One of the components of these new rules is the "ability to re-pay" rule, written by the Consumer Financial Protection Bureau.
The "ability to re-pay" rule requires mortgage lenders to make sure borrowers can actually afford their loans, in the short term and over the long term. It requires the lender to examine a borrower's income, assets, savings and debt against their monthly house payments.
Loans may no longer contain risky features such as terms that exceed 30 years and interest only payments. The new rules prohibit allowing borrowers to pay less than the monthly interest because paying less than the monthly interest actually causes the loan to grow each month.
A potential borrower's total debt load may not be above 43 percent of monthly income unless the loan is eligible to be backed by Fannie Mae, Freddie Mac or a federal housing agency. The new rules also prohibit upfront fees and points of more than 3 percent for loans above $100,000.
This doesn't mean that lenders cannot make loans outside these guidelines. Loans made outside the guiding principles, while still requiring income verification and confirmation of the ability to re-pay, would not be considered a "Qualified Mortgage" and would have less protection for the lender if there is a default.
It will probably become harder for marginal borrowers to obtain mortgages but that is the point to make loans less risky and maintain a stable market. Your daughter and her husband may want to consider a house they really can afford. Seeking the advice of a real estate attorney is always an option.
Attorney Sylvia Heldreth is a certified specialist in real estate Law. Her office is located at 1215 Miramar St., in Cape Coral.
This article is not intended as specific legal advice to anyone and is based upon facts that change from time to time. Individuals should seek legal counsel before acting upon any matter involving the law.