The Dodd-Frank Act (Wall Street Reform and Consumer Protection) Is Now In Full Effect
We are all fully aware of the often too easy process of getting a mortgage loan in the years prior. Especially relevant, to the reality of the most recent financial crisis. The irresponsible lending (and borrowing) that led to the inevitable crash as these subprime loans played a key role in the subsequent recession.
The Dodd-Frank Act, drafted in 2010, went into full effect on January 10, 2014.
The Dodd-Frank Act requires banks to adopt a more stringent process to ensure that loans issued are to borrowers that can actually afford the homes they wish to purchase. The rule of thumb is that your mortgage payment should not exceed 28% of your monthly take-home pay.
Following the housing bust, the Dodd-Frank Act protects the consumers. The days of minimal paperwork stated incomes, and overnight approvals are gone. Lenders must now request all forms of documents, including pay stubs, verification of assets, and tax returns. Additionally, they must evaluate expenses in order to determine the debt-to-income ratio and justify the loan.
Although this will require banks to invest in training, technology, and additional resources, we feel that the Dodd-Frank Act is a step in protecting the homebuyer. Even more so, it is guiding the market in the right direction.