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Frank Dodd Act: How it Impacts Procuring a Mortgage

Frank Dodd Act: How it Impacts Procuring a Mortgage

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By Elaine VonCannon, ABR, SRES, Associate Broker, Notary, Team Leader, Property Manager, Award Winning Agent

The Dodd Frank Law is going into full effect on January 10, 2014 and it will definitely affect the way homebuyers obtain financing for home purchases. It will have a direct impact the back offices of banks and mortgage brokers, by imposing more compliance protocols. According to Rachel Alexander, columnist for Townhall.com “All loan originators must now be qualified, licensed, registered, and issued a unique identifier.” Alexandar predicts that under these conditions, some mortgage companies will be going out of business.

Though the law is intended to further protect the consumer from banking debacles such as the recent mortgage and real estate meltdown of 2008 – it also has an undesired effect. Some elements of Dodd-Frank Law inhibit many potential homebuyers from obtaining a mortgage for a desired property. As creditors are well aware, there are many professionals and families still in recovery from the recession. This means that borrowers with secure jobs that lost a home in foreclosure or short sale and have not yet attained a high enough credit rating will be left out of the home buying arena. Homebuyers need to check with their lender for credit score requirements that are currently being used to procure a mortgage. Different types of loans have different requirements.

For those who are lucky enough to have secured employment since the recession began, most creditors are looking at stable employment in these positions for a minimum of 2-3 years to qualify for mortgages.

Positive effects of the law for consumers are not to be overlooked. The Dodd-Frank law eliminates the rules of mortgages past - which tied the origination fees to the dollar value of the loan. The Law puts a cap on the amount of money a loan originator can charge for a loan, and eliminates other extraneous bank fees as well. In the beginning, the Dodd-Frank law will take diminish mortgage companies’ bottom line. It is presumed these additional costs for loan origination will be handed down to the consumer, eventually.

Dodd-Frank is creating a real estate market that is top heavy with investors who, since 2009, represent one third of all real estate sales. Cash purchases on properties are not only popular with investors, but with individual homebuyers as well, who want to avoid the mortgage banking qualification process.

Instead of protecting the consumer, many of the restrictions put into place have put a stranglehold on the mortgage lending process for many Americans. Here’s a summary of mortgage lending qualifications that stymie homebuyers:

  1. Down payments of 3-20% are required now depending on the loan program. The only 100% financing available is from the USDA and VA loans.
  2. Stable income is established. Three years of income tax forms must be submitted, along with current W-2s.
  3. The cap on debt to income ratio is 43%.
  4. Homebuyers in most cases must also pay for closing costs, another financial hurdle that affects the timeframe of purchasing a home.

Investors Benefit from Dodd-Frank

Real estate investors are heavily represented in the current market. Many have liquid assets at their disposal and want to put them to work in real estate. However, the home vacancy rate is still hovering at 10%, indicating there is an abundance of inventory and not enough homebuyers to offset this. Investors realize there are more families and individuals on the rental market, so the market for the purchase of rental homes, townhouses, condominiums and multi-unit complexes has picked up and in some markets, new construction of rental units is on the rise.

Real estate investors are advised to take advantage of this market and examine real estate portfolios for properties that have reached full depreciation (12 years in most cases). If a property is fully depreciated – it’s time to purchase a new investment property and start the depreciation process anew. Investors should also identify a seasoned property manager to make certain once the home is acquired it is occupied by qualified tenants and maintained.

Learn more about real estate investment properties that are a great deal in your area, call 757-288-4685 or visit: http://www.voncannonrealestate.com.