New federal limits for 2014 to tighten credit

New federal mortgage rules go into effect in the new year aimed at preventing a repeat of the mortgage meltdown that led to millions of Americans losing their homes.

The rules make stricter lending practices official, but may not change much of the industry’s day-to-day practices because lenders have already tightened their credit standards in response to the housing crash.

The rules, from the federal Consumer Financial Protection Bureau, go into effect Jan. 10 and include these provisions:

• Lenders must base their decisions on a borrower’s ability to repay the mortgage. During the housing boom, lenders often wrote exotic loans that were affordable only for a year or two, when monthly payments were kept artificially low. Then, when payments rose, homeowners fell into default.

• Lenders can’t write mortgages unless the borrowers’ monthly debt payments (including the mortgage, car loans and other debt) come to no more than 43 percent of their income.

• Mortgage fees cannot exceed 3 percent of the loan amount. And loans can’t have risky features that were popular during the housing boom, such as payments that cover only the interest on a loan.

• Mortgage brokers can’t receive higher fees for recommending loans that cost the consumer more.

• Mortgage servicers cannot initiate a foreclosure until a borrower is more than 120 days delinquent, or if they’re also working with the homeowner to modify the loan to make it more affordable.