Frank Dodd Act: How it Impacts Procuring a Mortgage

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.

Buying Real Estate: Building a Lifestyle

In the current real estate market, both buyers and sellers have different objectives then they did five years ago. Then, many homeowners bought with the intention to hold a property for one to three years and sell it for a profit or to gain equity for the next property purchase. After the real estate and mortgage market downturn, many areas of the U.S. were flooded with short sales and foreclosed properties -- so buyers can no longer rely on this fast equity. Nowadays, most real estate professionals are recommending that homebuyers plan to hold their property investment for a minimum of 10 years.

Homes for Sale are More Likely to Sell if They are Move in Ready
These days, the trend in home buying is for move in ready homes. Most buyers cannot take out home equity loans for property improvements. It is imperative the seller makes certain appliances, fixtures, flooring, kitchens and bathrooms are in good condition or recently renovated or replaced. Homebuyers are in a place to be choosy. If they want fixer uppers they can purchase foreclosures or distressed properties. Sellers serious about closing on their homes will make the necessary renovations even before putting the home on the market.

Homebuyers Want to Purchase Homes Near Shopping Districts
If the home purchase is intended as a primary residence for ten years, it needs to fit the lifestyle of the family or individual who owns it-- perfectly. Right now the most popular trend in real estate purchases is to live close to mass transit, shopping and entertainment. Many people want to walk in their own neighborhoods and have easy access to everything they enjoy: the gym, restaurants, bars, movies, and more. Neighborhoods and condominiums close to main shopping districts will be more desirable then other areas where driving is necessary.

I have worked with many homebuyers over the years. Generally, I break down lifestyles into three types of areas: rural, suburban and urban. I ask homebuyers I work with which of these lifestyles they desire. Then we work on identifying other specifics about the home such as: pools, garages, multiple bathrooms, square footage and more. The most important parameter in purchasing a home is location. Price range for home purchases sometimes limits choices to certain areas, but I have found we can usually work around this and still find the buyer a desirable location.

Here’s my breakdown of the three locations related to lifestyle choices for homebuyers:

Rural: Do you need a property with acreage?
Many rural homebuyers are used to this lifestyle. They often own horses or enjoy boating, gardening, hiking or other outdoor activities. Some of these buyers will be new to rural living and making a change in lifestyle. To many who choose the rural lifestyle, living near a small town or in one is best, because there are grocery stores, doctors, restaurants and businesses nearby. Rural buyers will want a certain amount of acreage and outbuildings for additional guests or activities. Some of the buyers who want to own rural property will be more inclined to ask about green built features in a home, or be willing to purchase green built homes.

Living in the Suburbs
Some families and couples want peace and quiet or they choose to raise their children outside of rural areas and big cities -- but still want to be close to a host of activities. So they choose suburban lifestyles. Many suburban developments and communities are close to a city or an interstate entrance. Subdivisions appeal to various lifestyles such as: golf communities, waterfront homes with docks or dock access for boating, homes near a historic area, houses close to a national park or public trails, or nearby a shopping district. Suburban lifestyles can be varied but many have the same themes running throughout. Families want to be close to school and churches and have plenty of green space in the backyard for leisure activities such as grilling, swimming, playing or just relaxing. Multiple bedrooms and bathrooms are required with plenty of square footage.

Choosing the Urban Lifestyle
Professionals, people who travel a great deal, and individuals with sophisticated tastes in cultural choices, dining and entertainment want to live in urban areas. Mass transit and airports are easily accessible. A choice of restaurants and leisure activities is literally at the doorstep. Urbanites live life on the go and do not want to be bogged down with yard work. Many urbanites will want to purchase a townhome or condominium that will include exterior maintenance. Some urban dwellers will want amenities such as pools, gyms and community rooms included as amenities to complement the condominium lifestyle. Many will want to be within walking distance of restaurants, markets and bars.

These three lifestyle choices are a matter of personal taste and preference. Since home ownership is now a decade long commitment, lifestyles need to be carefully considered prior to purchasing a home. I often tell homebuyers to project 10 years into the future. For example, will the homebuyer need a space for an aging parent? Or, will the homeowner need extra room for a child or grandchild who may have to move back in for a while? These lifestyle changes could weigh in heavily on the decision of which home to buy.

Plan ahead by carefully considering lifestyle in your home purchase.

For more information on different lifestyles, visit http://www.voncannonrealestate.com.