How New Federal Laws Impact Homebuying

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Matt Morrell, vice president and home loan sales manager for Simsbury Bank, talks about what you need to know about new federal regulations regarding buying homes.

Explain to us what this new regulation is all about?

On Jan. 10, these new regulations were put into place to correct the errors that led to the housing crisis in 2008 and 2009. The regulations create a class of “qualified mortgages.” In the years preceding the crisis many products were introduced into the mortgage industry that didn’t require an applicant to prove with documentation that they could afford the mortgage payments. These were commonly known as “no income verification” or “stated income” loans.  Many of these loans had riskier features than more traditional loan products. When the financial crisis hit, consumers with these type loan products seemed to suffer the most and there was an outcry that the products had set the consumer up for failure. The new “qualified mortgage” classification is intended to prove prudent lending practices.

Who will these new regulations benefit?

They are intended to benefit the applicant and this is achieved by requiring lending institutions to document a customer’s income and assets to ensure as best they can that the applicant can afford the loan. Responsible lenders such as Simsbury Bank have always made this their lending practice. Inherent in the legislation, however, is that all of the responsibility falls on the lender to prove their diligence in this regard. The regulations take most of the onus of making a responsible financial decision away from the person actually applying for the loan. Ultimately, this results in less consumer choice when applying for a mortgage.

What will the biggest impact be for borrowers, or people looking to qualify for a home loan?

The biggest impact to borrowers will be the new debt-to-income ratio guidelines for what is considered a qualified mortgage under this legislation. The new rule will help lenders ensure that borrowers have the resources to pay their debts. However, depending on how much debt you have, this may mean that you may qualify for less of a mortgage in 2014 under the new restrictions.

What advice do you have to make this a smoother process for homebuyers?

Instead of being surprised after you find your dream home, it is better to get prequalified for a mortgage now, even if you’ve already done so prior to Jan. 10 of this year, so you know what you are able to finance under the new regulations. Also make sure you are diligent in collecting documents that will verify your ability to repay your loan.

Another important component of the new regulation is the ability to repay rule (ATR), which means you must be prepared to provide documents that prove your income and assets to your lender. This means you will have to be diligent in keeping records. The more precise your documentation, the quicker your lender may be able to turn your loan around. At minimum, examples of documents that lenders will require include W2s, tax returns, credit history, pay stubs and bank statements. Responsible mortgage lenders, like Simsbury Bank, have always required documentation such as this to ensure customers have the loan best suited for their situation. However, this new documentation rule will ensure verification consistency amongst all lenders.

Do you think that these new regulations will have an impact on mortgage approvals?

At Simsbury Bank, we have always employed prudent underwriting practices to ensure the integrity of our loans.  While legislation has increased income and asset verification requirements, it has not affected our desire or ability to provide loans to qualified applicants. For many lenders, the ability to repay requirements are common sense protocols that have been in practice and with which borrowers have already grown accustomed. In fact, according to the Consumer Financial Protection Bureau, more than 90 percent of mortgages in the current marketplace meet qualified mortgage requirements. Buying a home is one of the largest financial decisions a person will make in their lifetime. At Simsbury Bank we believe the customer should be just as interested in whether or not they can afford the home as we are as the lender giving them the money to do so. We will continue to work with every applicant to ensure that the decisions they are making make sense in their financial plan.

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