An article was recently written about proposed changes to lending practices in the mortgage industry. Some of the changes include:
- Creditors would have to take into account borrower’s income and employment
- Monthly payments would be calculated based on highest payment during the first five years of the loan
- Teaser rates wouldn’t be able to mask the true cost of the mortgage
- Lender would need to consider borrower’s ability to repay the principal and the interest of the loan
- Borrowers’ total debt payments could not exceed 43% of their pretax income
I think it’s great that the Consumer Financial Protection Bureau is taking steps to rein in an out-of-control lending market, but are these steps severe enough? Forty-three percent of your income is a pretty hefty amount. I had always heard and read that the amount of money spent on housing costs should not exceed 30% of your pretax income, which seems much more reasonable to me. Forty-three percent is a little to close to 50%, and giving away 50% of your income every month sounds like a bad idea.