New Mortgage Rules Take Effect in 2014

New Mortgage Rules Take Effect in 2014

Getting a mortgage used to be a lot easier.

In the years before the financial crisis, it was all too common for lenders to grant loans without first making sure that a homeowner could afford the monthly payments—and many times, they couldn't. (As we know now, these subprime loans ended up being one of the main roots of the recession.)

New rules set to take effect next year will attempt to make mortgages safer in the future. Starting January 10, banks will be required by law to ensure that borrowers can truly afford the home loans they'll be issued. The measure is a result of 2010's Dodd-Frank Act, designed to protect consumers in the aftermath of the housing bust and subsequent recession.

Lenders must now carefully vet applicants and review relevant documents like pay stubs, assets and tax returns to get a clear idea of a borrower's financial picture—and their ability to actually repay the loan.

Of course, this will mean more work (and more headache) on the part of the banks. But this could also affect consumers. Some now say that as a result of this change, there will be less choice for borrowers in the future.

Here's why: Stiffer restrictions mean lenders must refresh their underwriting policies, update technology and coach staff on the new rules. And while larger chain banks will be able to absorb these added costs of keeping compliant, there's concern that small-scale lenders may not be able to meet the requirements—and get knocked out of business. With fewer banks around, future homebuyers would have reduced options.

But while it may still be unclear just how the new rules will actually affect shopping for a mortgage, buying a home that you feel confident you can afford should be top of mind, new rules or not. LearnVest's rule of thumb: Mortgage payments should not exceed 28% of your monthly take-home pay. For more information, check out the mortgage basics you should know—and the top mistakes you should never make when purchasing real estate.

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