What You Need to Know Before Buying a Home This Year
New rules created by the Dodd-Frank Act will impact anyone looking for a mortgage loan in 2014, and beyond. While the rules are intended to protect consumers, and help avoid another housing market meltdown, there are a number of things today’s homebuyer needs to know.
Your Income will be Verified and Scrutinized More Closely than Ever
Under the Ability-to-Repay portion of the Dodd-Frank Act, mortgage lenders will be expected to a do a very thorough job ensuring that borrowers are reporting accurate income, and have the wherewithal to pay back a given loan. Specifically, lenders may:
- Directly contact the human resources department of the borrower’s employer to confirm employment status, and carefully document that information, including time, date and name of contact
- Ask for more than just a W-2 and/or payroll statement to verify income; complete tax returns, bank statements, benefits program documentation and more may now be required to get approved for a loan
You May Have Fewer Options in the Types of Loan You Can Secure
The Dodd-Frank Act encourages lenders to provide Qualified Mortgages. A Qualified Mortgage is defined as one that does not include certain risky features, such as:
- Any period of “interest-only” payments, when principal is not being paid down
- Negative amortization, where the loan principal amount actually increases, even while the borrower is making payments
- Balloon payments, which are higher payments that usually come due at the end of the loan term (these are not completely prohibited)
- Loan terms that extend beyond 30 years
Also of note:
- To obtain a Qualified Mortgage, borrowers must have a debt-to-income ratio (monthly debt payments, including mortgage loan payments, divided by gross monthly income) of 43% or better
- Points and fees paid by a borrower cannot exceed three percent of the total loan for a Qualified Mortgage
Lenders are not required to offer just Qualified Mortgages. However, lenders that do will be afforded greater protection from potential borrower lawsuits, a significant incentive as the industry moves beyond the mortgage crisis of 2008.