If you have tried shopping for a mortgage lately, you’ve probably encountered several difficulties. Mortgage documents are some of the most complicated papers that you’ll ever sign and the ordinary consumer does not understand everything that is explained when committing their name to the bottom line.
The Dodd-Frank Financial Reform legislation is seeking to simplify the process. This week, those new guidelines went into effect after months of testing their viability. Here are some new procedures and rules to look for when you are shopping for a mortgage as a result of the new guidelines.
Basic Information Cover Page
Instead of hiding the basic information about a mortgage loan (interest rates, loan amounts, monthly payments, closing costs, etc.) in the middle of the package of documents, lenders will now be required to put that information on the front page. This will help the buyer pinpoint all of the important information they need about their mortgage loan right away.
In addition to including this information on the first page, the lender will also be required to explain how the buyer’s payments, mortgage rates and the amount owed can change over the term of the loan. This information will need to include how high the monthly payments can potentially go along with information about insurance, taxes and other costs. This is all designed to help the buyer understand the total cost of the home before making the purchasing decision.
Information about Risks
Another guideline of the Dodd-Frank reform is that the lender’s forms need to give a clear warning to buyers about risky features. This includes information about prepayment penalties for the mortgage loan, the risks that are associated with adjustable rate mortgages and the possibility of a loan amount increasing due to negative amortization.
Instead of the huge packets of forms that have been commonplace when applying for a mortgage, lenders are making their forms simpler and shorter to give consumers a better chance of reading them and understanding everything that is in the agreement before they make their final decisions.
Realistic Loan Payment Determination
For a lender to offer a mortgage loan to a buyer, they must prove that they have a reasonable method for making payments on the loan. This means that the lender must calculate the payments based on a fixed rate that is equal to the fully-indexed adjustable rate plus 2.25 percent. As an example, if a buyer was getting a 5/1 ARM loan at 3 percent, the lender must calculate the cost of the rate based on 5.25 percent when determining if the buyer can afford the monthly payments.
These are just a few of the new regulations that you may notice with the Dodd-Frank reforms. Do you think they are going to be beneficial for buyers? Or is it going to make a difference?