Updates to Dodd-Frank Guidelines
In the past year, there have been a number of changes to how banks can make mortgage loans. Luckily for most customers, this doesn’t necessarily mean it’s harder to get a loan; it simply requires that customers be prepared to supply banks more documentation. Here are the key ways last year’s new Dodd-Frank guidelines changed how a bank can make your next mortgage loan:
- The federal government now requires banks to have formal documentation that a borrower has the ability to repay the loan. The Ability To Repay rule ensures all banks give thoughtful consideration before making a loan. There are eight factors banks must consider:
- Current or reasonably expected income or assets
- Monthly mortgage payment for this loan
- Monthly payments for other simultaneous loans
- Monthly payment for property taxes and insurance the home requires
- Financial obligations, such as debts, alimony or child support
- Monthly debt-to-income ratio
- Credit history
- A Qualified Mortgage assumes that a bank has fulfilled the Ability To Repay requirements, as well as met additional underwriting criteria. A QM protects consumers from overly risky mortgages and protects banks from potential liability if it can’t be repaid.
Previously, borrowers could apply for a mortgage without all the pieces of the puzzle firmly in place. Banks used to have more flexibility to use their judgment – doing whatever they felt prudent to make the mortgage. The good news is, for customers who show they can reasonably repay the loan, it’s not any more difficult to get a mortgage today. And for banks who were already using prudent judgment, we aren’t necessarily making fewer loans; we’ve just had to learn the ins and outs of new guidelines.
This edition of Market Momentum was written by President of the Mortgage Division, Cade Crawford.