Could New Lender Regulations for 2014 Affect Your Qualifications? Part 1

What is the Dodd-Frank Act?January 2014 Lending Laws

Congress has passed new legislation that will go into effect on January 10th 2014. What does that mean to home buyers? Basically, it means that lenders are now required to review each borrower’s “Ability-to-Repay”, or ATR, as part of the loan approval process. Lenders who fail to comply can and will be held accountable for damages incurred by borrowers unable to pay their mortgages.

Who will this impact?

Everyone will see stricter guidelines when applying for a loan. However, some may be affected more than others. To know if you will be impacted you need to know what these guidelines consist of.

The Dodd-Frank Act establishes eight components that must be documented and scrutinized throughout the loan approval process.

1. Current or reasonably expected income and assets that the borrower will rely on to repay the mortgage.

2. Current employment status.

3. Monthly payment for the mortgage being offered.

4. Monthly payment for any additional financing on the subject.

5. All additional components (e.g. taxes, insurance, HOA/condo dues, and ground rent.)

6. All additional recurring debts (e.g. revolving/installment debts, alimony, and child   support.)

7. Borrower’s total debt-to-income ratio.

8. Borrower’s credit history.

Well, that doesn’t seem much different, does it?

On the surface it seems pretty much the same, right? Not so fast! The Dodd-Frank Act is effectively adding an additional level of analysis to the decision lenders will make. This brings us to what lenders like to call Qualified Mortgages or QM. QMs are mortgages that have low-risk features and simple loan terms. QMs are acknowledged to be in compliance with ATR requirements. This is a type of safety net for lenders in the event of an ATR-related suit.

 

What types of loans fall under the “QM” classification?

All QM loans must meet the following requirements:

1.      No interest-only, balloon or negative amortization loan features.

2.      Maximum loan term is 30 years.

3.      Points and fees may not exceed these specific limits:

·         3% of the total loan amount for loans greater than or equal to $100,000

·         Higher points & fee maximums apply to smaller loans

So where does that leave us?

Well, the mortgage industry is still adjusting to the new legislation and there is much more information to share so you can be better informed. Read Part 2 coming soon for more in depth information about how all of this will affect private contractors, the self employed and many others.

Looking to purchase a home and want to qualify? click here.

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