December 10th, 2017 9:24 AM by Jackie A. Graves, President
Buying a home is one of the biggest financial
decisions you’ll make in your lifetime, and it can be difficult to choose a
mortgage amid the swirl of terminology and numbers. In addition to
understanding the interest rate, points and years of repayment, changing any
one of these variables results in your paying more or less each month — and
possibly much more or less over the life of the loan.
government regulations aimed at protecting both consumers and lenders from the
misunderstandings that can arise from all this data, help make the entire
process more transparent. Known as Qualified Mortgage, these loans require
lenders to get more information from potential buyers and do more paperwork,
but in the end, it gives lenders and buyers a better understanding of the
buyers ability to repay the type of mortgage they want.
Mortgages were implemented in 2014 by the Consumer Financial Protection Bureau
as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. It
aims to make sure lenders aren’t giving loans to consumers that will be
difficult to pay back. These rules were a direct result of the financial crisis
of 2008 that left many homeowners underwater on their mortgages and unable to
pay for their homes, which in turn resulted in record numbers of foreclosures
during the Great Recession.
The rules about Qualified Mortgages include the following:
may be longer than a 30-year term.
and fees must equal less than 3% of the total loan amount.
interest-only payback periods.
negative amortization, so the amount you owe in principal can never rise.
balloon payments, which are extra-large payments near the end of the loan’s
to how much of your income can go toward your debt, meaning that you can’t be
approved for a loan that takes up too much of your income.
must take into account your ability to pay back the loan before approving the
amount to avoid predatory lending situations.
a Qualified Mortgage means that you can be confident that your lender is
following these rules and that, barring any drastic changes in your income or
life circumstances, you should be able to repay the mortgage on schedule. This will help you keep
your home and avoid any damage to your credit score by defaulting on the
While these rules are helpful to homebuyers
and offer a level of protection against predatory lending practices, the
government does not regulate the interest rates charged by banks. Your rate is
largely determined by your credit score, which lenders use as a measure of
risk. A high credit score means that, based on your payment history, you are
likely to make your mortgage payments on time and in full. Likewise, late
payments or defaulting on a loan will lower your score and indicate to a bank
that you are not as good a risk for them — and they’ll likely charge you higher
interest rates as a protection for their investment in your house.
It’s in your best interest to know your credit
score and to check your credit report for any errors that
could make a bank want to charge you higher interest rates. The Fair Credit
Reporting Act (FCRA) requires Equifax, Experian and TransUnion — the big three
credit score reporting companies — to provide a free copy of your credit report
once a year.
You can access these on AnnualCreditReport.com.
You can also sign up for a free credit
monitoring service, which will alert you to any changes in your credit report
so you can nip any errors in the bud. Mistakes happen, but they can be costly when
it comes time to apply for a loan or mortgage. You also can get two free credit scores from Credit.com. This service also provides
a helpful explanation and breakdown of your score that allows you to plan for
improvements that will build your credit.
your rights as a borrower and knowing your credit score are crucial tools for
getting a great rate on your mortgage. Being able to borrow at an affordable
rate will open the doors to your dream home, so all you have to do is move in.
By Credit.com – To view
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