As this video explains, Federal laws put into effect in 2014 and supervised by the Consumer Financial Protection Bureau define lending practices and loan terms for a new category called “Qualified Mortgages.”
They provide stable loan features for consumers and improve legal protection for lenders who follow the guidelines.
These guidelines require lenders to assess each borrower’s ability to repay their mortgage loan.
As of 2014, guidelines require that a borrower’s monthly DEBT – including mortgage – be no higher than 43% of their monthly gross INCOME
The laws also define unacceptable loan terms:
- interest-only loans
- terms over 30 years
- negative-amortization loans that increase principal over time
- most balloon loans
do not meet the Qualified Mortgage guidelines.
The laws aim to provide consumers with objective guidance about reasonable debt from the CFPB and in return, to grant lenders who follow that guidance with higher levels of protection from lawsuits.
Ask your lender about Qualified Mortgage options for your home purchase.
Mortgage rates change constantly through an unpredictable combination of government policies and economic conditions. This video explains the common term ‘rate lock.’
A “Rate Lock” is a guarantee that a lender will honor a specific combination of interest rates and points for a given period of time. A lock protects a buyer from rate increases but commits them to a higher rate if mortgage rates fall below the locked rate.
As of 2014, rate locks aren’t usually an option until a purchase offer for a specific property – new-home or resale – has been accepted by the seller. The borrower’s credit score, the loan-to-value ratio property type, location and other factors plus, of course, market rates and market conditions will also affect rate-lock decisions.
Decide whether to lock or “float” based on your capacity for risk and your best rational knowledge about construction and closing schedules. If your rate lock expires an extension might be available but both you and the lender will be looking at current mortgage rates to decide the best option.
What Is A Certificate of Eligibility, or COE?
The COE is the key document that verifies to lenders that someone is eligible for a VA-backed loan.
Servicemembers, Veterans and National Guard and Reserve members may apply online or through their lender; most lenders have access to the system and can verify eligibility IF the VA has records on file.
The VA also maintains a hotline for assistance.
Surviving Spouses can use VA Form 26-1817 to request determination of their eligibility for VA Loan Guarantees.
Your lender may be able to assist with processing or contact the VA for information this video did not address.
What Are The Major Types Of VA Loans?
Major Veterans Affairs loan programs described in this video include:
1) Purchase Loans.
These help eligible parties buy a home at competitive interest rates with little to no down payment and little or no private mortgage insurance.
2) Cash Out Refinance Loans which enable taking cash out of home equity to pay off debt, fund school or make home improvements.
3) Interest Rate Reduction Refinance Loans also called Streamline Refinance Loans can help veterans obtain lower interest by refinancing existing VA loans
Other programs include:
4) Native American Direct Loans to help eligible Native American veterans finance homes on Federal Trust land.
5) Adapted Housing Grants to help veterans with service-connected disabilities buy, build or modify a home suited to their disabilities.
Many states offer additional resources to veterans, too.
Talk to your home lender about your situation.
What Are VA Loans?
As the video says, the name is misleading – they’re not loans FROM the VA.
The VA – short for “US Department of Veterans Affairs” – is the Federal military veteran benefit system.
The VA administers benefits and services for Servicemembers, Veterans their dependents and survivors.
Programs related to home loans are one of their key services.
The VA is not a bank; they do not provide home loans themselves.
But they do guarantee a portion of home loans provided to veterans and other eligible people by banks and mortgage companies.
These guarantees enable lenders to provide more favorable terms.
They are are commonly called “VA Loans”.
They cover buying, building, repairing, retaining and adapting homes for personal occupancy by eligible Veterans and survivors.
Measuring your existing debts against your existing income is one part of a lender’s required assessment of your ability to repay a loan.
Like the video says: debts are existing financial commitments; a car payment is a debt a grocery bill is not.
To calculate your debt-to-income ratio add up your monthly debt payments and divide them by your GROSS monthly income. (Gross income is generally the amount of money you earn BEFORE taxes and other deductions.) The Federally-established debt-to-income target is a maximum of 43% for Qualified Mortgages.
If your ratio is higher there may be other loans available – however, there may also be additional questions to establish your ability to repay, and the rates may be different than those available for Qualified Mortgages.
Studies suggest that a high debt-to-income ratio puts a homeowner at greater risk of challenges making monthly payments. So consider your situation and risks carefully before exceeding that suggested ratio.
What are the “Ability to repay” rules about?
In a nutshell, as this video shows, new laws require lenders to make a good-faith assessment of a borrower’s capacity to pay back their loan over time.
It’s a longer-term view that goes beyond immediate income, debt and credit rating.
These new Federal laws- supervised by the CFPB – require lenders to ask more questions –
about income, assets, employment, credit history, and monthly expenses –
as they relate to the proposed loan.
For example, a lender offering a mortgage with a low initial rate must try to assess how a borrower will handle the later, higher rate as well.
If you’re applying to borrow ask whether the program you’re considering is a Qualified Mortgage
Ability-to-repay rules are built in to loans that meet Qualified Mortgage guidelines.
If an eligible loan proceeds from Estimate to closing, creditors must provide a Closing Disclosure form documenting the actual transaction terms and costs THREE business days before consummation. It must be in writing, whether paper or digital, and disclose ONLY the information specified by the CFPB.
If terms or costs change prior to consummation the creditor must provide a corrected disclosure containing the updated terms. In some cases, this may require an additional 3-business-day waiting period to consummation.
Consummation and Closing are legally distinct although they may occur at the same time depending on applicable State laws. Consummation occurs when you become contractually obligated to the CREDITOR on the loan not, for example, the real estate seller. The Disclosure must be delivered three business days prior to the legal Consummation date.
Page 4 of your Closing Disclosure is important. It is NOT just standardized form information that is identical for every loan.
Review these terms:
- Assumption: can this loan be transferred to another person if you sell or transfer the property?
- Demand: can the lender require early repayment of the loan?
- Late Payments: what penalty, after what period, applies?
- Negative Amortization: does this loan schedule or allow payments that do NOT fully cover the interest due, resulting in increased loan principal?
- Partial Payments: what is THIS lender’s policy?
You should also review Escrow Account details to understand whether you will pay additional property costs via regular Escrow Account payments or handle them yourself directly.
The first page of your Closing Disclosure documents:
- The Loan Amount – the total you will actually borrow
- The Interest Rate – which does NOT include the fees factored into the APR on Page 5
If this loan has a penalty for pre-payment or includes a balloon payment Page 1 will summarize the terms.
Projected Payments will show the chief cost components – Principal & Interest, Mortgage Insurance and estimates of your Escrow Payments over the life of the loan. You may see different columns for different periods if changes in terms such as mortgage insurance change payment totals.
Closing Costs summarizes your loan closing expenses, and Cash To Close adds the additional amounts due to give you the cash balance you will need in 3 business days.