Mortgage laws to protect the borrowers

Mortgage laws to protect the borrowers

Purchasing a home is one of the largest investments you can make in your life. In the growing industry of real estate, it is quiet easy for someone to take advantage of you’re and walk away with substantial earnings leaving you at a loss. Fortunately for you and any other buyers, there are rules that are created to protect you from dishonest and irresponsible lenders. While there is no way to remove all the risks, you have better chances with the consumer protection laws.

The ability to repay

In the past, it was very easy to get a mortgage loan. Most lenders allowed borrowers to take up mortgage without verifying the income source, assets and financial status or if they will be able to repay the loan.  In most of those cases the borrowers defaulted on the loans because of minimal documentation.

Now, lenders must verify the ability to repay the loan by the borrower.  If the lender sees you meet their specific criteria, they can issue you with a qualified mortgage that offers them a legal protection if you cannot make the payments on the loan.

The key features of qualified loans include

Affordable monthly payments

Lenders ensure that the housing payments will not take up more than 40% of your income. Your debt to income ratio should ensure that you have money left over for monthly expenses.

Low risk loans

The qualified mortgages do not have any risky features. Some of the loans may look affordable at first glance but they cause problems. Some of the risky features include

Interest only loans- this means that you only make payments on the interest charges. This will prevent you from making any progress on the mortgage loans and you will not build any equity on your property. You will also need to pay a significant amount of money to sell the home after it loses the value.

Long term mortgages – qualified loans will not take more than 30 years like other basic mortgages.  30 year fixed rate mortgages are seen as affordable payments.

Negative amortization – basic home loans have a set payment schedule that works to reduce your debt over time. Some ARM loans allow the debt to increase while you are making smaller monthly payments.  The loans eventually convert to standard ones and cause a problematic increase in the balance

Clear disclosure

Lenders will scrutinize your finances as well as help you understand how the loan works. They provide you with a loan estimate after you application based on your monthly payments, the interest rate of the loan, tax and insurance estimates and the closing costs.  The loan estimates are in standardized formats to make shopping easier for you.

Sometimes, strict rules have a way of creating challenges for the borrower. Some rules make it harder for you to borrow.  Self employed people will face challenges when looking for a loan approval. To avoid the problems, you need to ask for trusted mortgage lenders from professionals and referrals from your friends and family.