In January 2014, new mortgage rules from the Consumer Financial Protection Bureau went into effect. Created in response to the financial and housing crisis, the new rules are meant to protect homebuyers from risky loans and from borrowing more than they can afford to pay back. If you’re in the market for a mortgage to buy your first home or you want to refinance your current mortgage, you should find out how the new rule will affect you.
The new rules create what’s called a qualified mortgage. One important feature of a qualified mortgage is the ability of the borrower to pay it back. “Ability to repay” under the new mortgage rules means your total debt, including the eventual cost of your mortgage, isn’t more than 43 percent of your monthly income.
Qualified mortgages also do away with risky features such as interest-only payments and negative amortization. With an interest-only loan, you make payments on your mortgage without ever chipping away at the principal. With a negative amortization loan, your payments on the loan are less than the amount of interest owed. The principal doesn’t decrease but actually increases because the unpaid interest is added to it.
Another key feature of the new rules is the requirement that lenders actually confirm a borrower’s income and credit history. The rules eliminate “no doc” loans, which allowed people to borrow money without first showing that they had the income to pay it back. The rule requiring more documentation and verification to get a mortgage reduces your chances of not being able to pay back the loan. It might also mean that it takes longer for you to be approved for a mortgage, and you’ll have to fill out more forms and paperwork when you apply for a mortgage.
Rules for adjustable rate mortgages
The new mortgage rules don’t eliminate adjustable rate mortgages, which is good news for homebuyers who want to buy a home to live in for just a few years before relocating. Adjustable rate mortgages typically offer a lower interest rate than a fixed rate mortgage. The caveat is that after a set period, the interest rate will change based on the market. You can benefit from an adjustable rate mortgage if rates are low and you plan on selling the home before the rate increases.
Under the new rules, your lender needs to give you ample notice that your rate is going to change before it goes up or down. The notice should give you plenty of time to either refinance the loan or sell your home, if that’s what you want to do.
One of the goals of the new mortgage rules is to take the confusion out of the home loan process. When you apply for a mortgage these days, you should have a clear idea that you can repay it and how long it will take to pay it back.
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