On January 10, 2014, new mortgage lending rules under the Dodd-Frank Act went into effect.
These rules are supposed to protect consumers from predatory lenders, while protecting taxpayers from having to bail out banks because they’ve made “bad loans.”
Never mind that it was the government that encouraged lenders to make the loans that caused the mortgage crisis. Now they’ve done an about face and are demanding the extreme opposite.
Part of the new rules are a return to basics, and then some. Lenders must actually qualify buyers before granting loans. They must check income, assets, expenses, and credit, and they must do it exhaustively. Borrowers should be prepared to document everything about their financial lives. The extent of the documentation is part of the bad news.
More bad news is that in order to grant a conventional loan which will be classed as Qualified Mortgage, the buyer’s debt to income ratio cannot exceed 43%. That means that all debt obligations, including the mortgage payment and attendant fees, cannot exceed 43% of the borrower’s monthly income. (See our November post explaining what is included in debt to income calculations.)
If you earn $100,000 per year, the new rule just reduced the amount you can pay for a monthly mortgage payment by $166 per month. This isn’t good news with home prices and interest rates rising.
Loans which are “GSE eligible” (FHA, VA, USDA) are exempt from this restriction, as are loans from small lenders (fewer than 500 first mortgages per year.)
The other bad news is that due to verification requirements, self-employed borrowers will have a tough time qualifying for a loan.
Why will lenders comply with the Qualified Mortgage restrictions? Because noncompliance will lead to vastly increased liability, should their borrowers default.
So what part of the new rules actually protect consumers?
“Teaser” loans have been eliminated. Lenders are no longer allowed to qualify a buyer using a 0.99% teaser rate when their interest rate will soon reset, doubling their payments. They can still offer adjustable rate mortgages to save consumers money in the early years of a loan, but the borrower must qualify at the higher rate.
Lenders can no longer be paid an extra fee from the bank in exchange for placing you in a higher interest loan. Meanwhile, the fees that your loan originator can charge you are now severely restricted.
Your bank’s loan servicer is now required to respond in writing to your written inquiries. They’re also required to inform you of options to avoid foreclosure should you get into financial difficulties.
Loan servicers now have to train employees – so they’ll be able to answer your questions and will no longer “lose” important documents.
So if you’re thinking of becoming a Texas homeowner, call us at 1-800-223-7409 or apply on line at http://www.mikeclover.com/ Our rates and fees were already low – without any mandates from the government.
So get in touch, we’ll be happy to get you pre-qualified and ready to make a winning offer.