This article covers changes to the mortgage approval process due to new regulations.
In the wake of the Great Recession and housing crisis, the federal government enacted mortgage reforms to protect borrowers, investors, taxpayers, and housing markets. As a result, the amount of paperwork for lenders and rules for borrowers increased dramatically.
If lenders don’t follow these tough mortgage regulations, they face fines, loss of approval to fund government-backed mortgages, and losses from loans that fail. All of this makes the mortgage approval process more difficult.
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How Regulations After the 2008 Financial Crisis Affect The Mortgage Approval Process
The real estate and credit meltdown of 2008 totally revamped the mortgage industry. Megabanks like JP Morgan Chase, Bank of America, Citibank, and Wells Fargo acquired many of the local banks. Thousands of mortgage bankers and mortgage companies closed their doors. Consequently, many of the popular mortgage products don’t exist anymore.
The newly created SAFE ACT established licensing guidelines for lenders nationwide. Previously, some states did not require any licensing, background checks, or training for loan officers. The act now requires loan originators to take national and state exams and undergo federal and state criminal background checks, personal credit checks, and financial background checks to get state mortgage licenses.
How Regulation Affects the Mortgage Approval Process
The creation of the Dodd-Frank mortgage laws and new mortgage regulatory agencies sparked the creation of new mortgage regulations year after year. New mortgage regulations constantly change without notice, and that could affect home buyers and homeowners seeking to refinance mortgage loans.
Mortgage regulations also set rules for banks, credit unions, mortgage bankers, and mortgage brokers. The main focus, ability to repay, means that lenders cannot originate residential mortgage loans if the borrower isn’t able to repay.
1. Ability to repay: Focus of the Dodd-Frank Act
In 2010, the Dodd-Frank Act also created a new federal mortgage and financial regulatory agency called the Consumer Financial Protection Bureau (CFPB). One of the reasons for the CFPB was to require lenders to analyze and evaluate if a residential mortgage is affordable to the borrower.
At first, most lenders treated the new rules and regulations as if they had the option whether to change their underwriting guidelines. In addition, the CFPB wasn’t enforcing the new rules and regulations. The Consumer Financial Protection Bureau has since made this a mandatory rule and part of the new mortgage regulations that took effect on January 10, 2014.
2. Verification of income and employment
The mortgage approval process now requires lenders to document and verify the following:
- Income
- Credit history
- Asset information
- All debt obligations
- Employment verification
Lenders need to review all of this information in order to determine if a borrower is able to repay his or her new residential mortgage loan. But in the event a lender doesn’t comply with these new rules and regulations and a borrower has a hard time making payments, the borrower may sue the lender who approved the mortgage loan.
3. New debt-to-income ratio cap for home buyers
The Consumer Financial Protection Bureau also created new mortgage regulations and guidelines for QM, or qualified mortgages. These rules protect lenders from lawsuits from borrowers.
To meet the qualified mortgage lending guidelines, a mortgage loan borrower will have a cap on their back-end debt-to-income ratio. The new DTI caps the mortgage payment at 43% of the borrower’s monthly gross income. But that includes the new housing payment and all other minimum monthly credit obligations as well.
4. Elimination of mortgage loan programs
Other mortgage terms and conditions that were offered prior to the collapse of the housing market have been eliminated. Effective January 14, 2014, lenders cannot offer the following products:
- 40-year fixed-rate mortgage.
- Optional mortgage payments that are less than the minimum monthly interest payment (this used to add the balance onto the borrower’s mortgage).
- Balloon mortgage loans.
Going forward, lenders will be capped at 3% on fees and points they can charge borrowers.
How the Mortgage Approval Process Impacts Buyers
The revised mortgage approval process has helped both borrower and lender. Lenders don’t have to worry about lawsuits from defaulting homeowners if they follow the new guidelines. On the flip side, it might be tougher for borrowers to get qualified for a mortgage. Still, by meeting these requirements, consumers should feel more secure when purchasing a home.
