The Dodd-Frank Wall Street Reform was signed in 2010, and we’re still trying to figure out what the heck it means. New mortgage rules go into effect January 10, 2014, and there is still a lot of confusion surrounding the updated provisions. While the industry waits for the dust to settle, we wanted to provide you with the certainties of what’s happening, and how consumers can be prepared.
Alphabet Soup
After the housing bubble popped in 2008, the government started scrambling for how to prevent such an economic collapse from happening again. The Consumer Financial Protection Bureau (CFPB) put together a set of standards of “qualified mortgages.”
These Qualified Residential Mortgages (QRMs) protect lenders from distressed borrowers. So as a potential home-buyer, don’t expect a loan if you can’t meet the new requirements set by the CFPB. Could a lender give you a loan anyway? Sure, but then they would have no safety net from the government and they could lose thousands if you turn out to be a risk.
Is Anyone Exempt?
The government found a way to exempt itself from its own laws… Go figure.
If your loan is eligible to be sold to Fannie Mae or Freddie Mac, you are already qualified for a QRM. Also, if your loan is insured by the Veterans Association, USDA, or a couple other government-based programs, you are good to go. These people do not have to worry about the new requirements.
That being said, you can expect all loan programs—even Fannie, Freddie, and the like—to make a shift towards the new requirements. They are only grandfathered into the old rules for seven years, plus they will want to shift regardless just because the new, stricter rules involve less risk for them.
What We’re Up Against
Here are the factors (the first two being the potentially tricky ones) that lenders will consider if you meet the requirements for a QRM:
1. Monthly Debt to Income (DTI) ratios, less than or equal to 43 percent.
2. Current debt obligations: student debt, alimony, child support, etc.
3. Current or realistically expected income or assets.
4. Current employment status.
5. Monthly payment on the covered transaction.
6. Monthly payment on any miscellaneous loans.
7. Monthly payment for mortgage-related obligations: Homeowner’s Association, etc.
8. Credit history.
The total points and fees on a loan may not exceed 3 percent. What exactly qualifies towards points and fees, however, is still very much up in the air.
The Surprising Victims
The new rules generally make sense, and protect the buyer from him or herself in a lot of ways. There are, however, some people who will be unable to obtain a loan in 2014 that you wouldn’t necessarily expect:
• The stricter DTI ratio will make it hard for people with student debt to meet eligibility.
• Retired people with no current income may not qualify, even if they have adequate savings.
• Non-salary workers who rely on recurring bonuses or overtime will have to prove that such supplementary income is completely reliable, in order to balance out the DTI ratio.
• Self-employed and freelance workers will have to prove stability in income, which will likely require years of evidence of various incomes.
• Those who lost their jobs in the recession will have a hard time proving reliable income. Even if they’ve since found work that pays better, it takes years to be considered stable by the new standards.
Read the rest of the article at the HouseHunt Network Blog.
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