In response to the real estate bubble a new set of guidelines was set up in an attempt to protect the market and consumers from another collapse. The 2,000 some pages that are the Dodd Frank Wall Street Reform and Consumer Protection Act are about to hit the real estate market. Not surprisingly these government attempts at protective measures arrive some seven years later and most likely will be seen as overreaching in the short term and readjusted for reality in the long term. Since we live in the now let’s take a look at how these measures will affect the Orange County real estate market and Orange County homebuyers.
The new rules take affect beginning January 10th 2014 and will have a measurable affect on Orange County Real Estate. The big issue is the creation of the Qualified Mortgage. A Qualified Mortgage is a highly screened and vetted mortgage that removes the lender from possible legal ramifications and lowers the scrutiny level of regulating bodies. In the new mortgage market a buyer who receives an unqualified mortgage can sue the lender if they have trouble repaying or if they are paying and the regulatory bodies will apply much more scrutiny to unqualified mortgage providers. So if you’re a lender and you are facing higher scrutiny and exposing yourself to possible legal challenges if you provide a product I am pretty sure your not going to willingly readily offer that product.
So what exactly is a Qualified Mortgage? It mainly covers eight criteria outlined below:
1) Debt to Income Ratio – the market has had lenders commonly tolerate up to a 50% DTI for the best borrowers, but now that number falls to 43%. To figure out your DTI add up all your monthly debt payments (credit cards, loans, etc.) plus your new monthly housing payment divide that total by your gross monthly income and multiply by 100 and keep your fingers crossed that it is less than 43. The impact for those of us in Orange County real estate stems from our much higher price points which typically allowed a higher DTI to seem reasonable since the home value was much higher than say Phoenix.
2) Proof of Employment – you will need to be able to prove your source of income and that you have a job that will be there in the long term. If your self employed this gets a lot trickier, but most experts agree lenders will be looking for two years of tax records in the same field with stable or growing income. There isn’t much clarity yet of whether they will be looking at corporate gross income minus a standard percentage reduction or net pass through income/salary to you as an individual with no regard to the entity top line. This one can have a big impact in Orange County real estate since we have a lot of self-employed people here and reported personal income may not be a true reflection of the ability to pay.
3) Taxes, Insurance and Homeowners Fees must be affordable – all three of these will be added in to calculate your ability to pay and affordability now. Obviously here in South Orange County homeowners fees are extremely common so make sure you add those costs into your DTI calculations to be sure your going to have an affordable payment according to the new qualified mortgage rules.
4) Second Mortgage Payments will count with the first – commonly banks providing the first mortgage didn’t calculate your second mortgage when figuring your DTI because your second mortgage is attached to the same property as your first and could only foreclose on you by making the first whole so they were covered. With the new focus on consumer protectionism first mortgage providers will have to calculate any second mortgage payments into your DTI for qualified mortgages. In my experience in Orange County real estate around 10% of purchase money mortgages have only one mortgage attached to them, so obviously this will be an important consideration.
5) You need to Fully Disclose any other properties you own and their related costs – again in the spirit of consumer protectionism even though the new mortgage is secured against the new property and the other property lender has no rights to the new property nor does the new lender have any rights to the previously purchased property the costs associated with the previously purchased property have to be disclosed and calculated in the qualification for the new property.
6) Child support and Alimony now count – some lenders ignored this in the past but going forward these have to be considered and calculated meaning you could qualify on income and debt but be denied because your alimony affects your ability to repay assumption under Dodd Frank.
7) You will need a Clean Credit History and Good Credit Score – higher scrutiny will be made of your credit score as well as your past history.
8) Your Income and/or Assets will have to be enough to cover your Mortgage Payment – simply higher scrutiny on income and assets including source and stability and measure of ability to successfully cover your monthly housing costs.
What does this mean for Orange County Real Estate Buyers?
- Prepare for greater scrutiny of your loan application
- Get your credit report and check not only your score but also your history to make sure everything is correct
- Calculate your DTI and make sure it is under 43% with the new housing costs
- Verify your income and make sure it is enough to justify the mortgage
- If your self-employed make sure your last two years of federal tax returns shows personal (or pass through) income that is stable or growing and make sure those last two years were spent in the same field.
- Figure all your new home related costs (mortgage, second mortgage, insurance, taxes, homeowners association dues) into your new housing costs
What does this mean for Orange County Real Estate Sellers?
- Expect the market to slow down a bit – these regulations are aimed at stabilizing the market a by product of which is a reduced number of people who qualify to buy and a reduced dollar amount others qualify for. We still expect the market to rise next year but the pace will most likely be slower and overall year over year gains will be less.
- Expect longer escrows – as lenders are waddling through these new waters you need to be prepared for delays as they try to make sure they are following the new rules properly.
The best advice I can give is to work with a mortgage lender who has taken the time to education themselves on these new rule changes and has prepared to navigate the waters. I have a few excellent lenders who are ready to help you and have put in the time and effort to learn what we are dealing with in the new year, so if you need to talk to someone feel free to contact me I am glad to help.
949 599 6860