If you're thinking about refinancing your home loan, you may want to push yourself to refinance sooner rather than later, especially if you're not sure you can qualify for a new loan. The CFPB's "Qualified Mortgage" (QM) rules go into effect January 10, 2014, will make it more difficult for some borrowers to refinance. The new rules say that if a lender approves a mortgage loan that doesn't meet QM standards, then the lender will have to keep that loan in-house rather than sell it to Fannie Mae or Freddie Mac. This will limit the loans offered by lenders to borrowers with spotty credit or debt problems.
Refinancing impact of QM
While some observers believe the new rules tighten credit standards too much, others say that the rules simply put into government regulation something lenders are already doing. The CFPB rules say that borrowers must have a maximum debt-to-income ratio of 43 percent and that all income and assets must be verified. The QM rules are anticipated to have the biggest impact on low-income individuals who will have trouble keeping their housing payments low enough to meet the debt-to-income ratio and on some borrowers with less steady income. The rules won't allow loans with negative amortization, interest-only or balloon payments to be considered qualified mortgages.
The most important element of the new rules is that a lender must establish your ability to repay your loan by reviewing all of your income and all of your debt and determining how much you'll have left over to pay your other bills -- including things that fluctuate such as food and utility bills.
If you have fluctuating income based on bonuses, commissions or self-employment income, you may have a harder time getting a mortgage under the new rules since you will have to prove that you have sufficient income to repay the loan. You'll need to provide tax returns that can prove you have enough income and that you have a history of stable or rising income. If you've been in business less than two years, it's likely to be even more difficult to find a lender willing to approve a refinance.
However, if you're in a loan that the CFPB defines as "risky" such as an interest-only loan or one with a balloon payment, a lender has the leeway to decide if you can qualify for refinancing even if you don't meet all of the QM requirements.
Refinancing before QM goes into effect
If you're concerned that your debt-to-income ratio may be too high for a new mortgage loan or simply want to refinance at current mortgage rates, you should consult a lender as soon as possible to discuss your options for refinancing. Whether you want to shorten your loan term, lower your monthly payments or get a lower interest rate, a lender can evaluate your individual needs and work with you to find the best mortgage loan.