By Jesse McCarl
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.
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.
The new rules will block out a lot potential buyers, as seen above. But even if you meet the new
requirements, there will be some unforeseen repercussions.
As details of the new provisions come to light and kinks are worked out in the next several months, loan underwriters are going to err on the side of caution to make sure they cover their assets. You can expect a lot of paperwork. You will have to provide documentation for every imaginable source of revenue or debt to try to qualify for a loan. This will be particularly frustrating if you’ve already been through the loan and home-buying process because it will be so much more intense than last time. No matter how aggravating it may seem, try to stay calm. The lender is not an evil person, s/he’s simply not in a position to budge on what’s required.
You may also find that you qualify for a loan at one major bank, but not another. This is not some government conspiracy determined to ruin your life. This is just what’s bound to happen as lenders figure out the obscurities of the new bill. Until everyone feels comfortable, lenders will exercise caution, which isn’t exactly good news for borrowers on the cusp of the new DTI ratio.
Some lenders have already implemented the new 2014 rules in an attempt to be as prepared as possible. Other lenders haven’t even been trained on the new rules because so many of the rules are still undetermined. So if you thought you’d rush out and get a loan before the January stipulations, you may already be out of luck.
If you have minimal debt and can prove reliable income, go ahead and move forward with your home-buying adventure. But if you think you may have trouble qualifying based on these new rules, your best bet is to slow your roll and focus on either paying off your debt or building a bigger down payment to lower your total interest.
In this upward-swinging economy, home values are only going up and interest rates will follow suit. It is understandable if you feel like you absolutely cannot wait to purchase your first or next home. If that’s the case, and you have just a bit too much debt, consider a private loan. An example of this would be if a family member or friend could pay off some of your debt so that you qualified for a mortgage loan, and then you paid them back personally. If a parent pays off your car, you could suddenly qualify for a mortgage loan. Repay the parent with your normal payment plan, but have it wiped clean from your credit. Then you are spared if the lucrative economy brings home values up in the amount of time it would have taken you to pay off that debt.
A broker may be a buyer’s best friend under the new policy. A broker will have the consumer’s best interest in mind while maintaining a solid grasp on the new policies. S/he will understand if and when a lender is being unnecessarily stingy.
Many people will suddenly not qualify for a mortgage loan in 2014. Even those who do qualify will have to go through a much more tedious process. And there will be general trepidation on the part of lenders while they figure out the nuts and bolts of the new rules. Expect all of these factors to temporarily stall the housing market progress that has taken years to rebuild. Luckily, this will likely be short-lived as buyers and lenders quickly adjust.
Once the dust settles, however, the market will only benefit from these new conditions. Everyone can be more confident in their investments in 2014. Home-buyers will know they’re not getting in over their heads with loans they’re entrusted with.
Many lenders have been operating under restrictions similar to what is about to become law ever since the economic collapse. It is very likely that the general public won’t even feel the new rules. No matter the potential frustrations, the new provisions will allow you to move into your new home with insured buyer confidence.
HouseHunt extends special thanks to broker Cindy Chung of iapprovehomeloans.com for providing us with the most up-to-date information about the 2014 mortgage rule changes. We encourage you to visit her site and utilize a broker as you move forward with the buying process in the coming year.