22 Jul
Dodd-Frank Act: Proposal to Increase Mortgage Down Payments
Posted by Alice  |  Dodd-Frank, Real Estate

From my conversations with buyers and sellers these past few months, it has become apparent to me that most of my clients are not aware of the Dodd-Frank Act that became law in July of 2010. Even more important, I have realized that most of them are also not aware of the current proposal to increase the required mortgage down payment to 20%.

Under the Dodd-Frank Act, financial institutions that securitize mortgage loans are required to keep at least 5% of the loans that they approve. However, if the mortgage is a qualified residential mortgage (QRM), then it is exempt from this requirement.

Due to the Dodd-Frank Act, federal banking regulators have released a proposal that will define and create QRMs. The proposal would include a requirement of all mortgages to be at a 80% loan to value, which would require a 20% down payment. The proposal would also limit the total mortgage payment to 28% of the borrower’s income and limit all debt to 36%.

From the perspective of financial institutions, they will want to minimize the percentage of loans that they retain. Therefore, if the act is passed, they will definitely increase down payment requirements across the board. Currently, borrowers have many other options for mortgage loans, including FHA loans (with a 3.5% down payment requirement), and 5-15% down payment conventional loans. If this act is passed, it will restrict the qualified borrower pool even further, and this will certainly be a detriment to the already fragile real estate market.

Since it was becoming more evident to me that most of my clients were not aware of this proposal, I wanted to shed some light on this topic. Voting on this act is currently set for August 1st, 2011. I strongly urge you to contact your local legislator as soon as possible, to let them know how this act will negatively impact the real estate market. A 20% down payment requirement on mortgages will price a large group of buyers out of the buyer pool. This will directly impact the number of homes being sold, and increase the already high level of inventory of homes currently on the market.

If you are a seller who has their home currently on the market, you should be aware of this proposed act, because it will directly impact your chances of selling your home quickly. If you are a buyer who is currently actively looking to purchase a home, you should be aware of this proposed act, as it will directly impact your buying power.

Feel free to contact me with any questions regarding the proposed act.

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