Why is it getting harder to get a mortgage? What does it mean for you?

WHY IT MATTERS

We all remember the “liar loans” and fraud uncovered in the mortgage business when the real estate bubble burst. To try to prevent that from happening again, Congress passed the Dodd-Frank Act in 2010.

Now, after much debating and drafting, some of the most significant rules of Dodd-Frank are in effect (as of January 10), and they’re already changing the mortgage landscape.

Even though the new rules are a back-to-basics approach meant to reduce the risk of defaults and foreclosures, opponents argue that the new laws go too far, making mortgages unnecessarily difficult and costly to obtain. They say the new rules may even hurt the predominantly moderate-to-lower income borrowers they were designed to protect.

Under the new rules, if your lender makes a “Qualified Mortgage” or QM, it’s presumed to be a mortgage that you will be able to repay. These QM loans restrict risky features like excessive fees, teaser interest rates, interest-only payments and negative amortization loans where the principal balance of your mortgage increases over time.

Other factors of QM loans include:

• Loans with terms over 30 years are not allowed.
• Loan fees cannot exceed 3%.
• Only certain types of adjustable rate or balloon loans are allowed.

These changes mean you’re less likely to have hidden surprises. Lenders won’t be able to lure you into a mortgage that’s not within your budget. These changes also put an end to most “no-doc” loans.

But perhaps most importantly, for you to be approved for a Qualified Mortgage, your monthly debt cannot be more than 43% of your income. With home prices rising — but wages not — this may be an increasingly difficult criteria for average home buyers to meet. In fact, by some estimates, stricter rules are already preventing about 15% of home buyers from being approved for a mortgage.

FHA, Fannie Mae, Freddie Mac, and some smaller banks are temporarily exempt from this debt-to-income ratio requirement while we all adjust to the new Dodd-Frank law. But you can expect to see pressure on politicians and regulators to reconsider this rule and other Dodd-Frank rules. In the meantime, if you’re thinking about getting a mortgage, make sure you’re prepared to meet the new Dodd-Frank mortgage rules.