As I mentioned last week, the Dodd-Frank regulations going into effect on January 10th will have a significant impact on both the mortgage industry and individual borrowers. Under the new regulations, there are a number of requirements to classify a mortgage as a Qualified Mortgage, and if a mortgage does not meet these stringent guidelines and the borrower goes into foreclosure, the borrower can actually sue the bank for granting an unsuitable loan. And among the rule changes associated with Dodd-Frank in January is the Ability to Repay Rule.

This new rule requires that a borrower be able to reasonably repay the loan given his or her current debts and income. In an effort to ensure this, a hard cap of 43% DTI has been mandated. In the past, some lenders could go as high as 51% in the right circumstances, but those types of exceptions will no longer be possible. And the home buyers this most affects are first time home buyers and middle class home buyers.

This affects these segments because these are the segments most likely to stretch their budget when purchasing a home, as they see their potential future earnings as a way to justify stretching the budget. But there is some hope in this, as some new programs are soon to be released which will help borrowers in the 43-45% DTI space.

So if you are in the market for a new house next year and have a current preapproval letter, it might be time to consider revisiting what you can actually be approved for. Because the room to approve those higher mortgages is being eliminated.

If you would like a new preapproval letter showing the amount you would qualify for under the Dodd-Frank Act which goes into effect on January 10, please contact me so that I can walk you through the process. And if you have anything to add about the DTI limits of the Ability to Repay Rule, please leave a comment.