Passed as a response to the late 2000s recession, the Dodd-Frank Wall Street Reform is the most significant change to financial regulations in the United States since the reform that followed the Great Depression. This new reform, in regards to real estate, was written to protect the industry from predatory lenders, unqualified borrowers, and to hold banks more accountable by increasing their due diligence work.
As a logical consequence of the Real Estate crash in 2008, the pendulum of loan lending shifted. All major banks, to eliminate risk, are since exclusively underwriting loans through the government sponsored organizations Fannie Mae and Freddie Mac. As mortgage funds are provided from these institutions, the banks are subject to their strict underwriting rules, and eligibility requirements for these mortgages have now changed as of January 10th, 2014.
The guiding principle behind Dodd-Frank is to ensure the borrower has enough financial strength to fulfill the loan’s obligations. The borrower must prove a debt-to-income ratio of 43% or less (must be fully verified), loans must not exceed a 30 year term, must be amortized and points and fees are not to exceed 3%.
The Good News
How these changes ultimately impact the housing market has yet to be seen. With certainty we can state that it is generally harder to qualify for a loan, resulting in less qualified buyers.
However, it is not all bad news. While these new rules are restrictive to lending, the impact on real estate transactions is expected to be minimal, as
- Lenders have pro-actively adjusted long before the regulations took effect.
- Already 95% of the pre-Dodd-Frank loans are compliant with the new regulations.
- Private mortgage lenders are not subject to these new regulations and can underwrite loans according to their own comfort level.
- Banks are starting to once again underwrite non-compliant loans, especially for their high net worth clients.
What You Can Do
If you are in need of a loan, you are well advised to work with a lender early in the process. This will set realistic expectations and ensure a smooth process.
You can always take advantage of our lending network. Please contact us for more information and to connect with a highly qualified loan officer.