Roger Smith of LaSalle Financial offered up this timely financial red flag at The Grubb Co's Tuesday morning meeting and I thought it worth passing along as it may profoundly affect your ability to borrow funds from here on out. (No, I'm not including a pithy anecdote this week; this news flash is story enough and you should read on - especially if you are in the market to buy.)
As of January 10, 2104, as part of the "Dodd-Frank" regulations on first mortgage loans, all Lenders will be required to determine a borrower's true ATR (that's "ability to repay") BEFORE underwriting a loan.
"Haven't they been doing this all along?" you appropriately wonder.
Why yes, they have, but NOW the Lender is financially responsible if a defaulting borrower can prove that the lender did NOT thoroughly determine whether or not the homeowner could actually pay the loan back. (Gee, what a concept.)
In other words, the bank can no longer foreclose on a house, OR the defaulting party, IF they shouldn't have made the loan in the first place!
"Come again please?"
The Bank is responsible for their lending practices, not the consumer.
Given that the onus is now on the bank to do more due diligence prior to making a home loan, you might imagine that tougher lending requirements are likely to follow . . . and you'd be right. There are many aspects to this new regulation, but the one that will impact many potential borrowers (that's you) is the hard and fast rule that the DTI can no longer exceed 43%!
That stands for "Debt to Income Ratio," and it is calculated by taking one's gross monthly income and dividing it into the total monthly debt. Included in "monthly debt" is total housing expenses, or "PITI" (principal, interest, taxes, insurance - and HOA fees should they apply), as well as recurring payments on consumer debt (i.e: student loans, car loans, credit card payments, etc.), AND total payments on other properties owned (vacation homes, rental properties, commercial properties - for those fortunate enough to own additional properties).
In short, what are your TOTAL EXPENSES on a monthly basis? (Surprisingly, private school and college tuitions are not yet counted as part of a borrower's monthly debt, but that's likely to change, given the expense of these educational institutions - as any of us can attest to who currently have kids in college or private schools.)
Whether you agree with this stricter fiscal policy or not (many will say these guidelines make practical sense, while others believe that lending requirements are already too tight) the result is that with much tougher restrictions in place, Borrowers are likely to qualify for less today than they would have this time last year.
How does this play out for Buyers?
If you are in the market and have a pre-approval letter dated from 2013, you will absolutely need to double back with your lender/broker to make sure you still qualify for the amount outlined in last year's understanding. (Don't be surprised if the amount has been reduced dramatically.)
This is just one example of how these new regulations will impact potential borrowers, but it's not the only calculation. We haven't even touched on liquid assets vs. savings. Equity that is locked up isn't going to cut it no matter how much is sitting in your 401K or Charles Schwab accounts unless it is paying high dividends and can be counted as monthly income. Got it?
If you would like further information or have any specific questions, feel free to call Roger Smith at: (510) 339-4300, or email him at: email@example.com .
Thank you, Roger. That was rather timely, although not necessarily the most welcome news to date. (I know, you're just the messenger and we appreciate it.)
Julie Gardner, has been writing The Perspective for 15 years and has published more than 500 essays. She is also a frequent contributor to the Sound Off column in the Real Estate section of The San Francisco Chronicle.