It's going to be tougher to get a mortgage after January 10. That's the deadline for lenders to fully enact provisions first outlined in the Dodd-Frank Wall Street Reform and Consumer Protection Act back in 2010, in the wake of the sub-prime mortgage crisis. Eager to prevent future housing meltdowns, legislators outlined formal requirements for borrowers seeking what are now called "qualified mortgages" (QMs), designed to cut the odds that loans will turn into financial stink-bombs. Many banks tightened standards shortly after the Lehman Brothers meltdown, but now they'll all be encouraged by law to be more careful. (Banks can still offer non-qualified mortgages that don't abide by these regulations, but those won't be protected from lawsuits brought by homeowners in default who claim they weren't properly vetted, which means such loans are likely to be much rarer.) "This is a game-changer," says Don Frommeyer, president of the National Association of Mortgage Brokers.
Here are the new hoops:
1. Freelancers and the self-employed won't be able to get reduced-documentation loans anymore. They used to be able to snag approval for mortgages based on gross income, often a higher figure than the net-income stated on tax filings. (People who own their own businesses usually have expenses they can deduct from the gross.) The paperwork was fairly abbreviated; the interest rates decent. Now, under the Ability-to-Repay provision, the self-employed (along with everybody else) will need to turn in at least two years' worth of tax and banking documentation, plus anything else banks ask for in order to vet credit-worthiness, says Melissa Cohn of Guaranteed Rate, which has a heavy portfolio of NYC-centric clients. Everyone will have to account for deposits made in amounts over $500, too. (That loan your roommate gave you to help pay the rent that one time? Hope she kept her canceled check so you can prove it came from her and not some sketchy cash transaction.)
2. Bye-bye, interest-only loans. These are popular among New Yorkers who get paid partly by commission (like lots of Wall Streeters, who often want low monthly mortgage payments and pay down the principal come bonus time). Cohn says about 90 percent of lenders stopped giving interest-only loans after Lehman, but there were still many in the city who were willing to do so. Now borrowers — about 5 to 10 percent of Cohn's business — will just have to qualify for the comparatively higher monthlies that typical 30-year mortgages demand, save up for a bigger down payment, or try to find a non-QM loan.
3. Fewer loans lasting longer than 30 years, either. Yes, they do exist, and again, they help people maintain low monthly payments in a pricey city. Cohn says Astoria Federal, an active lender of 30-plus-year-long loans, nixed them a month ago to prep for Dodd-Frank's QM must-haves. Plenty others walked away from these types of loans long ago.
4. Your monthly living expenses — mortgage, taxes, credit-card debt and other loans, and the like — can't account for more than 43 percent of your gross income. Considering how expensive it is to live in New York, lenders once were allowed, depending on an applicant's credit, to push that number to 48 percent (even 50 percent, says one mortgage broker). Not anymore. Cohn says one client she's working with has $100,000 worth of deferred student loans. He's not due to start making payments anytime soon, but the banks will take them into account now, years before they come due. If you own a townhouse or a multi-family, they'll be looking at utility bills, too, says Guardhill Financial's Julie Teitel, who adds, "quite frankly, you probably shouldn't buy anyway if you're above 43 percent."
5. If you're getting an adjustable-rate mortgage, banks will be calculating whether you can pay monthlies at the fully indexed rate at application time. Many banks adopted this strategy long ago, but it's solidifying come January 10. That applies even if payments aren't going to be recalculated for another three or five years. (Or you'll have to agree to a higher interest rate.)
For now, there are few, if any, workarounds. Eric Applebaum, president of the tristate-based Apple Mortgage, says a few of his lenders have informed him they'll still be in the non-QM game, but there aren't many of them, and they'll be deciding on an applicant-by-applicant basis. "We're convinced there'll be a new secondary market for non-QM loans," says Cohn. But that could take months, maybe more, and there won't be as many of those lenders. "If you want to borrow today, you're going to have to follow the rules," she says. On the other hand, appraiser Jonathan Miller says Dodd-Frank is simply cementing a world order that isn't all that new anymore. "I don't think this is going to be some sort of housing market slayer," he says. "It may make it harder for some to buy, but maybe they shouldn't be buying if [they're] that close to the wire."