If you’re in the market to purchase new home, we want to help you understand how the new Dodd Frank mandated Qualified Mortgage (“QM”)/ Ability to Repay (“ATR”) regulation may affect you in obtaining a mortgage.
Effective January 10, 2014, the Consumer Financial Protection Bureau (“CFPB”) implemented regulations it created to satisfy the Dodd Frank law that are designed to demonstrate a borrower’s ability to repay a mortgage. The regulations impose underwriting requirements on all mortgage lenders that must be satisfied in order for a mortgage to meet the QM test and its protections. For borrowers who obtain their mortgages from community banks and other reputable lenders, there will be little change to the process of obtaining a loan. Most community banks have always used sound underwriting and required documentation to prove credit worthiness. As such, most of the burden of the new regulations will fall on the banks rather than you. However, borrowers who last financed their homes with “low doc”, “no income verification” or other “creative” mortgage products will find a significant change in the amount of information they must provide to their lender in order to obtain a mortgage.
If you were pre-qualified for a mortgage last year, you should get pre-qualified again.
The biggest impact to borrowers will be redefined debt to income ratio maximums in order to obtain a Qualified Mortgage. The new rule is intended to ensure that borrowers have the resources to pay their debts. However, depending on how much debt you have, this may mean that you qualify for less of a mortgage in 2014. Instead of being surprised after you find your dream home, it is better to get prequalified again now so you know what you are able to finance under the new regulations.
Be prepared to provide the documents that will verify your ability to repay your mortgage.
Another important component of the new regulation is the Ability to Repay rule (ATR), which means you must be prepared to provide documents to your lender that prove your income and assets. This means you will have to be diligent in keeping records. The more precise your documentation, the more likely that you will meet the requirements under the new legislation, which will increase your chances of loan approval. At a minimum, examples of documents that lenders will require include W-2s, tax returns, credit history, pay stubs and bank statements. Responsible mortgage lenders like Simsbury Bank have always required documentation such as this to ensure customers have the loan best suited for their situation. However, this new documentation rule will ensure verification consistency amongst all lenders providing mortgages meeting the QM standard.
You will have fewer product choices.
The QM/ATR regulations generally prohibit loan features such as balloon payments, negative amortization and interest only payments. Additionally, the loan term may not exceed 30 years. The prohibition or limitation of certain mortgage loan features was promoted by those who believe that too many consumers were steered by unscrupulous lenders toward riskier products that they did not fully understand. Rather than relying upon more effective disclosure and consumer education as well as more effective enforcement of regulations designed to reduce the likelihood of rogue mortgage brokers steering clients to products they cannot afford, both of which are addressed in Dodd Frank, the legislation’s authors were persuaded that consumers could not be trusted to make informed borrowing decisions. As a result, product innovation and consumer choice have been stifled by Dodd Frank. While Simsbury Bank and most community banks chose not to offer such alternative mortgage products, their legislative prohibition deprives appropriately informed consumers of choices that may be perfectly safe given the borrower’s unique circumstances.
For many lenders, it’s “business as usual”.
At Simsbury Bank and most community banks, we have always employed prudent underwriting practices to ensure that our customers have financing that achieves their goals and our lending decisions are consistent and supported by facts. While Dodd Frank has increased the compliance requirements we must meet, it has not diminished our desire or ability to provide loans to qualified applicants. In fact, we have expanded our mortgage marketplace during the past several years to include all of Southern New England.
Being a prepared borrower and working with a lending partner like Simsbury Bank, that has your best interests in mind, will ensure you are successful in securing the mortgage that is right for you.