The home loan industry has new rules in place for home buyers, aimed at protecting them against abusive mortgage loan practices that lenders used in the past. The Consumer Financial Protection Bureau calls it a “Qualified Mortgage”. Beginning in January 2014, a “Qualified Mortgage”, has rules and protection set up to make sure you get a mortgage loan you can afford.
Protection is critical to avoid what happened in 2006—a time when mortgages were easy to get but hard to hold. Many home buyers who received loans during this period didn’t realize how risky they were or how they could harm them. In fact, borrowers naively assumed that lenders and mortgage brokers wouldn’t make them a loan that they couldn’t afford. Instead, lenders dangled interest-only, subprime, and negative amortization loans to buyers, initially qualifying them for the loans. Eventually, the foreclosure rates on those loans reached an all-time high between 2006 and 2007 when they couldn’t afford the payments. The domino effect led to the credit crisis, the gateway to the Great Recession, which lasted from 2007 to 2009.
It was easy to blame the catastrophe on consumers seeking the American dream of owning a home or on government fiscal policy that urged lenders to ease lending requirements for potential home buyers. But other sinister objectives were in play—greed played a major role, mortgage bankers would approve unqualified borrowers with low credit scores and insufficient income in order to make huge amounts in fees, sometimes more than $10,000 per loan.
The new “Qualified Mortgage” takes some of the angst out of buying a home, helping home owners qualify for valuable tax deductions, not to mention it’s a good way to build wealth—the net worth of a homeowner is normally higher than that of a renter. “Qualified Mortgages” offer a stable category of loans that analyzes the likelihood that homeowners will be able to afford their homes in the long run.
Qualified Mortgages can’t have these loan features:
- Interest-only period – when you pay only the interest without paying down the principal.
- Negative amortization – when the loan principal increases over time, even after making payments.
- Balloon Payments – when the payments are larger than usual at the end of the loan term.
- Loan terms that are longer than the traditional 30 years.
Qualified Mortgages protects you with key features
- Limits how much of your income goes toward debt – your monthly debt including the mortgage can’t be more than 43% of your monthly pre-tax income.
- Limits the ability of lenders to charge excessive upfront points and fees.
- Lenders must verify your financial status – income, assets, credit history, and debt-to-income ratio.
Ask your residential loan lender for a “Qualified Mortgage”, one that follows common sense rules assessing your ability-to-pay increasing your chance of maintaining your dream home.