Good news for people shopping for a mortgage -- and for current homeowners facing foreclosure because they can no longer afford their home loan: New mortgage regulations drafted by the Consumer Financial Protection Bureau recently took effect and they provide a slew of new rights and protections for consumers.
One of the cornerstones of the new mortgage rules is that lenders now are required to evaluate whether borrowers can afford to repay a mortgage over the long term -- that is, after the initial teaser rate has expired. Otherwise, the loan won't be considered what's now referred to as a "qualified mortgage."
Qualified mortgages are designed to help protect consumers from the kinds of risky loans that brought the housing market to its knees back in 2008. But obtaining that designation is also important to lenders because it will protect them from lawsuits by borrowers who later prove unable to pay off their loans.
Under the new ability-to-pay rules, lenders now must assess -- and document -- multiple components of the borrower's financial state before offering a mortgage, including the borrower's income, savings and other assets, debt (including alimony, child support and student loans), employment status and credit history, as well as other anticipated mortgage-related costs (home and mortgage insurance, property taxes, etc.)Qualified mortgages must meet the following guidelines:
- The term can't be longer than 30 years.
- Interest-only, negative amortization and balloon-payment loans aren't allowed.
- Loans over $100,000 can't have upfront points and fees that exceed 3 percent of the total loan amount.
- If the loan has an adjustable interest rate, the lender must ensure that the borrower qualifies at the fully indexed rate (the highest rate to which it might climb), versus the initial teaser rate.
- Generally, borrowers must have a total monthly debt-to-income ratio (including regular bills, outstanding debts and potential mortgage payments) of 43 percent or less.
- The guidelines don't specify a minimum down payment or credit score to qualify.
- Loans that are eligible to be bought, guaranteed or insured by government agencies like Fannie Mae, Freddie Mac, the Federal Housing Administration and the Veteran's Administration are considered qualified mortgages until at least 2021, even if they don't meet all QM requirements.
Most lenders adopted much tighter lending practices after the financial crisis. The CFPB estimates that over 90 percent of existing mortgages already comply with the guidelines. So-called "no-documentation" and "low-documentation" loans, where borrowers with shaky paperwork used to be approved regardless of whether or not they could actually afford the mortgage, are now forbidden.
Lenders may still issue mortgages that aren't qualified, provided they reasonably believe borrowers can repay -- and have documentation to back up that assessment. For example, many lenders plan to continue making interest-only and jumbo loans or waive the 43 percent debt-to-income ratio for certain customers. However, they'll have fewer legal protections than with qualified mortgages should a buyer later default and decide to sue.
New, tougher regulations also apply to mortgage servicers. (Lenders frequently sell loans to investors after the mortgage has been signed. Those investors, not the consumers, often choose the mortgage servicing company, which is responsible for collecting payments, handling customer service, escrow accounts, collections, loan modifications and foreclosures.)For example, mortgage servicers now must:
- Send borrowers clear monthly statements that show how payments are being credited, including a breakdown of payments by principal, interest, fees and escrow.
- Fix mistakes and respond to borrower inquiries promptly.
- Credit payments on the date received.
- Provide early notice to borrowers with adjustable-rate mortgages when their rate is about to change.
- Contact most borrowers by the time they are 36 days late with their payment.
- Inform borrowers who fall behind on mortgage payments of all available alternatives to foreclosure (e.g., payment deferment or loan modification).
With limited exceptions, mortgage services now cannot: initiate foreclosures until borrowers are more than 120 days delinquent (allowing time to apply for a loan modification or other alternative); start foreclosure proceedings while also working with a homeowner who has already submitted a complete application for help; or hold a foreclosure sale until all other alternatives have been considered.A few other features of the new mortgage rules include:
- Anyone who is paid to offer, arrange or assist in finding you a loan cannot be paid more to steer you into a higher-cost mortgage.
- If you pay someone directly in connection with a mortgage, he or she generally cannot also receive payment from someone else for the same transaction.
- Self-employed individuals and others with inconsistent income may have to show additional qualifying information, such as several years' tax returns.
- The new qualified mortgage rules do allow exceptions for refinancing a consumer out of a risky loan. For example, the ability-to-repay rule may not necessarily apply when a lender refinances a borrower from a riskier mortgage to one that's more stable.
This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.
To participate in a free, online Financial Literacy and Education Summit on April 2, 2014, go to Practical Money Skills for Life.
The Internet has turned me into a hardcore comparison shopper, and apartments are no different. There are dozens of apartment rental sites listing dozens of properties in my hometown. It pays to check out several of these sites when you're looking for a new pad. I mentioned a few sites you should use (and a few you shouldn't) in The Best (and Worst) Apartment Rental Sites. But don't stop your search with your computer. I found my last apartment through a "For Rent" sign in the window. The place was $150 cheaper than anything else I found, and I never saw an online ad for it.
Location is everything in real estate. If you live in the most popular area, you're going to pay the highest rent. But if you move a couple of miles (or sometimes even a few blocks) away, you can get a serious discount. For example, renters in my city (New Orleans) pay about $1,250 a month to live in studio apartments on a trendy street. I live four blocks away and pay $750 a month for a one-bedroom. I don't get bragging rights, but I'm still within walking distance - and I'm saving $500 a month.
I start looking for a new apartment a month or two before I need one. If I find a place I like, I keep an eye on it. More often than not, private landlords lower their asking price if they don't find a tenant within a week or two.
You're locked into your rent as long as you're under a lease. If you sign a longer lease, you'll be locked into the lower rate if the cost of rent goes up. Two years ago, my friend signed a three-year lease on his apartment. Last year, the landlord raised the rent $200 across the complex. By locking himself into a set rate for three years, my friend has saved $2,400 so far.
I am not a haggler, but when it comes to my single biggest expense, I negotiate. It doesn't always work, but if you do your homework - and give the landlord a good reason - he may be willing to lower the rent. (Learn how to haggle here: The Simplest Way to Save on Everything.) Start by researching the average rent in the area. If the landlord is charging more than everyone else, print out a few ads to prove it. Then convince the landlord that he should want you as a tenant. I ask for referral letters from my previous landlords, make copies of my bank statements, and pull my credit report. By showing the landlord that I'm a good tenant - and I know that he's over-charging - I can negotiate a better rate.
I always compare the cost of the rent with the amenities or the utilities that are sometimes included. For example, I recently looked at two duplexes. One went for $775 a month but didn't include any utilities or a parking space. The other rented for $800 a month but included water, trash, Wi-Fi, and an off-street space. Obviously, $775 is cheaper than $800. But when you consider the average water and trash bill in my area is $50 a month, and the average Internet cost is $45 a month, I'd actually save $95 a month by going with the more expensive rental.
If you have a skill a landlord needs, you might get a discount on your rent. My landlord rents a unit to a tenant who also serves as our maintenance guy. In exchange for doing the odd job, he gets $350 a month off his rent. But you don't have to be handy with tools. Landlords occasionally need people to maintain their website, design rental ads, or manage their properties. If you've got free time, offer to trade your services for a discount.
A few of my neighbors have made a quick profit by renting out their place for the night to tourists. Granted, there are some serious downsides to the idea - like your place possibly getting trashed - but my neighbor made $300 in two nights. If you live in a popular city, you could stand to make a profit a few times a year. Just make sure you get your landlord's approval - and ask for a security deposit before you open the door to strangers. If you're a renter, also check out 6 Myths about Renter's Insurance - and How to Save and 9 Ways to Remodel Your Rental Without Breaking Your Lease.
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