The mortgage meltdown fueled by irresponsible lending practices created a nationwide banking emergency that sent the country into a recession late December 2007- June of 2009. Here is everyone on how this presidential election impact home loans.
In the midst of the financial crisis a new political party and agenda was put into place and amongst their agendas was to “clean up” and prevent another financial crisis from ever happening again. “Change” is another word for legislation, and a bundle of laws called the Dodd Frank Wall Street Reform Act and Consumer Protection Act were passed.
The Consumer Financial Protection Bureau was launched to police the financial industries. To its credit the have accomplished some amazing things especially related to collection companies, credit bureaus, and payday lenders. All of which have been operating with little to no oversite at the expense of the consumer. The CFPB has also successfully simplified the mortgage process, and eliminated predatory mortgage programs that benefit only the banks providing the loans and setting up the homeowner for failure like negative amortization loans, pre-payment penalties and balloon loan terms.
On the flip side, the CFPB is also responsible for the rules and definition of a “qualified mortgage.” A corner-stone of the definition of a qualified loan surrounds the concept of the “ability-to-repay- rule, making it nearly impossible for a self-employed borrower to secure a home loan with the documenting income on Federal income tax returns. Mortgage banks are financially encouraged to lend within these qualified mortgage guidelines and avoid making mortgage loans to people who fall outside of the qualification perimeters. As a result, home loan options for the self-employed have been few and far between, up until 2015 when bank statement program began to emerge offered by a few small mortgage banks who identified the massive number of extremely qualified self-employed borrowers who made more than enough money to support a home loan, but did not fit into the tax return requirements of the qualified mortgage. The ability to qualify for a home loan for the self employed borrower has been a part of the collateral damage of the restrictions set forth by the CFPB. Many self-employed people have felt a disenfranchised with the policies related to income. They are not breaking any laws, the ability to deduct expenses related to operating a business is a right and to be punished with a lack of access to mortgages loans has frustrated many people across political lines.
Will the recent Presidential Election Impact Home Loans for the Self-Employed?
One of the cornerstones of the Trump campaign was the restructure or the dismantling of the CFPB. In theory, the CFPB requirements and restrictions on banks is preventing these banks from lending money to businesses large and small. Changes in these policies will in-turn create jobs and stimulate economic growth. From a mortgage product prospective, if banks were allowed to take more risks, there is a higher probability that there would be an expansion of mortgage products to service the needs of the self-employed.
However, there are two important factors to consider:
These changes will in no way happen over-night. It has been said that it would be easier for the new administration to dismantle Obamacare than it will be to replace the CFPB. Changing the CFPB’s statute would require a Senate vote. Realistically the Republican administration will attempt to restructure the power of the CFPB with introduction of several new Bills and resolutions. There is little chance that these resolutions will result in the re-emergence of wide-spread access to stated income loans that resembled the alternative income loans available between 2001-2007.
There are currently many mortgage lenders that are offering financing solutions to the self-employed currently. Bank statement programs provide mortgage solutions to self-employed people who cannot people who cannot document their income using Federal Income tax returns required by the majority of lenders who are making loans that fit the Consumer Finance Protection Bureau’s definition of a qualified mortgage loan.
Lenders offering bank statement programs require that the applicant provide evidence of self-employment for a minimum of two years by either a business license or CPA letter. Income is determined by an analysis of business related deposits into checking or savings over a period of twelve months. The average of these deposits is used as gross monthly income to qualify for a home loan. The programs also require the documentation of reserve assets once the mortgage is in place. Typically, these lenders are looking for a minimum of twelve month of assets that cover the monthly mortgage payment including home owner’s insurance and property taxes.
Bank statement programs are currently available to self-employed borrowers looking to purchase, refinance, and even take cash out of a primary residence, second home and even investment properties. Many of these bank statement programs will even offer interest-only options allowing the self-employed homeowner to maximize his or her monthly cash-flow with the requirement of only the interest payment to be made for a period of time.
Many people are extremely excited with the possibility of a restructure of the CFPB and effectively minimizing the oversight that the entity has over banking in the United States. More than likely the changes will evolve slowly over time eventually impacting many aspects of commercial and consumer banking including mortgage lending. In terms of loan options to the self-employed, more than likely what will happen is more mortgage banks will offer loan programs similar to the bank statement programs that are already available with the market place. This will provide a great deal of relief to the homeowners who have been turned down by their bank, not because the product is not available, but because the bank simply does not offer the program.
Moving forward, mortgage products that offer alternative income documentation will always require the self-employed borrower to reasonably document a history of positive income in the form of bank statements. The program will also require the documentation of asset allocation allow the homeowner to continue to make the mortgage payment in the event of any business down-turn. The days of stated income and stated asset mortgage programs have very little chance of returning with or without the CFPB.
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