If you are involved in the real estate industry in some capacity, you have probably heard of impending loan changes brought on by the Dodd-Frank Act. Recently, new loan guidelines were put into place that will have an impact on anyone buying or selling a home. These changes, made by the Consumer Financial Protection Bureau, are aimed at protecting the buyer and making sure new loans will be strong enough to sell on the secondary market. The two biggest loan changes deal with the ability to repay and what is considered a qualified mortgage.
Many in the industry argue that these changes are long overdue. In regards to a qualified mortgage, one of the items lenders look for is the total monthly debt obligation in relation to a borrower’s gross monthly income. That number, or debt-to-income ratio, was as high as 60% right before the mortgage market collapsed. Over the past few years, lenders were operating at 50% DTI. With the qualified mortgage changes, that number is now at a 43% total debt-to-income ratio. Some lenders may still go over this with compensating factors in place. Factors may include increased assets or higher credit scores, but if they do, they may have to keep that loan in their portfolio for the foreseeable future.
The other notable qualified mortgage change deals with total fees and closing costs. Buyers are now looking at a maximum of 3% in closing costs with no upfront fees at all. These fees include: mortgage broker points, title insurance and any origination fees. This will almost certainly eliminate any buyers going to the closing without knowing their fees and being taken advantage of.
The second major change is regarding the ability to repay. In addition to stricter debt-to-income ratios, lenders will be more vigilant verifying monthly debts, income, assets and credit. This will make for a slightly longer application and approval process, but it shouldn’t cut down too much on who can be approved and who can’t. The drawback is that most loans are ultimately underwritten by Fannie Mae or Freddie Mac and they have minimum credit score requirements and guidelines. This is in addition to the changes. Even if a lender approves a loan and it passes their guidelines, it may not pass Fannie or Freddie guidelines and the loan will be rejected.
All and all, the changes may not have as big an impact as you may expect. There will surely be some impacted by borderline debt-to-income ratios, but for the most part, it should be business as usual. If you are selling, you should call your broker or lender and see how the changes impact current or potential buyers. If you are buying, be ready to produce even more documentation.
