A look at our industry one year later
While the namesake(s) of the Dodd-Frank Act are currently enjoying retirement, any utterance of their controversial legislation still brings eye rolls, angry rants and a bevy of unintended consequences for real estate investors.
Although the legislation was intended to “create less risky consumer loans” it has made it nearly impossible for investors to get “qualified loans” from banks — forcing them to look for new types of financial support like crowdfunding and creative financing. Plus the rules on seller financing have dramatically changed. And it’s not just investors who are impacted — potential first time homeowners or those recovering from a foreclosure don’t meet the debt to income ratio to qualify for a mortgage. This means there are less buyers looking to pick-up investors’ inventory.
So what does this mean?
- Your investing strategy might need to change: Less qualified buyers mean more renters looking for single family homes, apartments and condos. With more opportunity to rent perhaps picking up a few income properties is worth it? Remember, a quick flip and ultimate sale with seller financing (if the home will be the buyer’s primary residence) will be forced to comply with Dodd-Frank. If you only plan on doing one flip/sale a year then maybe you’ll be safe. But we’re willing to bet you’d like to flip/sell more than one property a year.
- SAFE Act VS Dodd-Frank: They’re not separate pieces of legislation. They work together. The SAFE Act establishes who can write/originate a loan document and Dodd-Frank affects the lending/qualification process.
- Financing verification regs have changed: On a non-qualified loan you need to verify the buyer’s ability to repay the loan. This includes an 8 step underwriting process:
- Verify employment
- Verify current income
- Analyze the monthly housing payment
- Look at other monthly loan payments
- Look at any other mortgage payments
- Look at alimony or child support payments
- Must have a 43% DTI
- Analyze credit history
Or you can write only qualified loans but that’s not easier. Even qualified loans have a list of regs a mile long.
- It’s still very open to interpretation: A year later there still isn’t any case law or hard and fast rules about Dodd-Frank. If you are trying to avoid Dodd-Frank rules thru an exemption, like doing less than 3-5 sales a year, you better have it notated in your loan docs. Do your lease options border really close to a sale? You better re-evaluate your rent credit terms and length of the lease.
This by no means is an exhaustive list of ways Dodd-Frank impacts you as an investor, nor does it contain any legal advice. If you are concerned about Dodd-Frank we urge you to reach out to your lawyer or a lawyer in your area that focuses on real estate law. For more information about Dodd-Frank join us at the March meetings.
March Meeting Agenda & Logistics:
6:00-7:00pm: The Investor Lab — Join us for one or all of the following:
Food Served from 6:00-7:00pm
- Workshop Troubleshooting Forum
- "Hot Seat" featuring an expert in deal finding, marketing, financing
- Team & Resource Building
- Haves & Wants and Sharing Success
7:00-8:30pm: Main Meeting — How Colorado Investors are Creatively Financing Deals, and Where we are with Dodd/Frank - the SAFE Act
8:30pm: Continued Open Networking
Tuesday, March 10th
Wednesday, March 11th
Denver Monthly Meeting – How Colorado Investors are Creatively Financing Deals, and Where we are with Dodd/Frank - the SAFE Act
(Click For More Information)
Thursday, March 12th
Northern Colorado Monthly Meeting – How Colorado Investors are Creatively Financing Deals, and Where we are with Dodd/Frank - the SAFE Act