The financial crisis that took place only a few short years ago has had far-reaching effects with respect to the way our economy functions today. One of the places that this is felt most acutely is in the housing market. It’s simply a fact that homebuyers will find it much more difficult to secure a mortgage today than they would have only a decade ago.
There are, of course, a number of different reasons for this. However, the biggest reason is the Frank Dodd Act, which introduced sweeping reforms to the ways in which lenders are able to go about their business. While, to a certain extent, this is a good thing for the economy overall, it’s not necessarily great news for homebuyers, especially those who are looking to make their first purchase.
The stricter regulations mean that homebuyers have more hurdles to jump when securing a mortgage for their new property. But, what are those hurdles, and how might they affect you if you’re entering the housing market? That’s the question that we’ll be answering below.
Demonstration of Sufficient Income and Assets
Of course, this is nothing new. Those who issue mortgages have always been looking at the raw financials of their borrowers. However, the Dodd Frank Act has caused more urgency to be placed upon this issue. As such, you will necessarily have to demonstrate to a lender that the total of your income and your assets will be sufficient for paying the mortgage you’re applying for. In the past, you may have been able to stretch things a bit; this is no longer the case.
Demonstration of Ability to Pay Taxes, Premiums and Fees
While borrowers have always been able to research and account for the property taxes, insurances premiums, and homeowner’s association fees that they would have to pay with a particular property, lenders are now required to provide this information up front. Further, they will need to account for a borrowers ability to make these payments, whereas in the past this was a thing that could be “looked over” a bit. Of course, this is a good thing for any potential borrower, as they will be able to understand the full costs associated with a property rather than just its ticket price.
Rock-Solid Credit is Basically a Requirement Now
If a homebuyer’s credit isn’t as clean as a whistle, they’ll either find that the mortgage rates they’re offered are untenable or that they may not be able to secure a mortgage in the first place. With the Dodd Frank Act in effect, lenders are afraid of doing anything that might be considered untoward, with the government’s focus placed squarely on “predatory lending.” Therefore, while your credit score has always been important, it’s never been more important than it is today. If your credit score leaves something to be desired, then you’d be well advised to do what you can to repair it before applying for a mortgage.
Debt-To-Income Ratios Need To Be In Line, Too
Although this has always been a consideration in the loan process, it’s now becoming more and more important. This is due to the fact that lenders have become increasingly stricter with respect to the debt-to-income ratio they’ll allow themselves to accept. In the current climate, many experts concur that at 38% debt-to-income ratio is the cutoff, which is much higher than it has been in the past. However, this has the possibility of becoming even more strict as time goes on, with lenders increasingly wary of issuing anything that might be considered an unsafe loan.
Steady Employment is a Must
When attempting to assess the credit-worthiness of a borrower, lenders will pay particular attention to the borrower’s employment situation. They won’t, however, just be looking to see that you have a job. Rather, they’ll be looking to see that you have a job that’s likely to be there next year and the year after that. For first-time homebuyers who are also new to their jobs, this can present problems when securing a mortgage. In addition, with the financial crisis having affected the job market significantly, some homebuyers will find themselves struggling to meet these requirements. Finally, those who are self-employed will find that proving the stability of their employment can be quite difficult.
Other Properties and Mortgages Are Now a Factor
In the past, other mortgages that you might be paying would not be factored into the equation when you’re applying for a new mortgage. The Dodd Frank Act has changed that. Now, lenders are required to look at any other mortgages that you might be paying, and they then must factor that in when assessing your worthiness for the loan. Further, lenders will also look at other properties that are owned by the borrower, factoring any debt related to those properties into their calculations.
Court-Mandated Payments Are Now A Factor, Too
While this won’t necessarily apply to everyone, it will certainly apply to some. Individuals applying for a mortgage who are making payments for alimony or child support will now have to disclose those when applying for a mortgage. To be sure, this has always been something that the FHA takes into account when issuing mortgages. However, it is now something that all lenders will be looking into as well, which is something to keep in mind if you’re making these kinds of payments.
Stay Abreast of Changes in the Upcoming Years
With all of these things now being taken into account by lenders, it’s harder than ever for many homebuyers to secure the mortgages they need. In many cases, this may deny them the ability to become homeowners, and in other cases they may not be able to get the home that they want or need.
All of that being said, as quickly as the Dodd Frank Act changed things several years ago so might things change again. We are, after all, entering an election season that could change the makeup of the government dramatically. If this is the case, then changes in the way that the housing market operates should be expected.