2014 marks a fresh start, a blank page for many as does every New Year. 2014 also ushers in change and the mortgage industry will have plenty of it. You see, 10 short days into 2014 monumental government regulations will be effective. Many feel these new rules drastically change how home loans are originated. However, not much of anything is changing.
How Does 2014 Change a Home Loan?
Dodd Frank regulations are effective starting January 10, 2014. Now, mortgage lenders must meet new underwriting standards. The Ability to Repay and Qualified Mortgage sections of Dodd Frank top the list of things industry experts are losing sleep over.
For example, the Ability to Repay Rule lists a new max debt to income ratio of 43%. 43% is below pre-2014 max debt to income ratios. Lenders worry about this causing issues for many home-buyers trying to qualify for a new loan.
I too would be worried if the 43% debt to income ratio was a final end all/be all Dodd Frank ruling. However, a second Dodd Frank rule permits debt to income ratios to exceed 43%.
Temporary QM Makes All the Difference
There is a second rule which provides flexibility for 7 years after Dodd Frank’s effective date. Temporary QM Rules allow lenders to use debt to income ratios they have been for years after Dodd Frank is in play. Temporary QM lets a mortgage lender use current (pre-Dodd Frank) FHA, VA, USDA and Conventional debt to income ratios. The key criteria? Lenders must receive an automated mortgage approval. This exception lasts for 7 years after Dodd Frank is effective or:
- When Fannie Mae and/or Freddie Mac are phase out (whichever comes first)
- When FHA, USDA, VA implement their own Qualified Mortgage rules (whichever comes first)
On January 10, 2014 not much changes. Many of the guidelines outlined in the Dodd Frank Act are in line with what mortgage lenders have been doing for years.
By Jeremy House