During the past few years, the process of obtaining a mortgage loan has changed quite a bit. New regulations created in the aftermath of the financial crisis now require lenders to follow "Ability-to-Repay" rules that provide reasonable assurance that a borrower can afford the loan. It also encourages lenders to make only "qualified mortgages" that fit certain risk requirements to further protect borrowers.
In 2016, prospective homebuyers have a few new rules that they should be aware of. Specifically, there are new forms, better tools available online, and getting a loan in a rural area will be much easier.
New forms add simplicity and transparency
New forms introduced in October will make the mortgage application process much more transparent for borrowers in 2016. Within three days of applying for a mortgage, the borrower will receive a Loan Estimate Form that discloses all of the estimated costs of the loan, including taxes and insurance, as well as any ways that the loan's payments could change in the future.
This form also includes information that allows you to compare how quickly you'd pay down the loan's principal balance over a five-year period. When comparison shopping, this section of the form is a powerful way to see which of your offers will help you build equity the fastest. In the past, this information would have required a spreadsheet and complex projections. Today, that work is the responsibility of the lender.
Before your loan closes, the bank is now required to provide you with all of your loan's closing documentation at least three business days prior to closing. This requirement guarantees that you'll have adequate time to actually read through the paperwork, and ensures that your documents are written exactly as you expected.
Better, unbiased information online
The Consumer Financial Protection Bureau (CFPB) has launched a new, online resource center for borrowers. This website is a powerful tool for navigating the entire journey through the mortgage process.
The website is unaffiliated with any lenders, meaning you can trust its calculators, worksheets, and guides without worrying that they're actually marketing tools in disguise.
Some of the more helpful features include an interest rate tool that estimates what you should expect to pay based on your location, your credit score, your income, and the size of your mortgage request. This information is, again, unbiased, meaning you can go into the bank's office fully informed on what a fair interest rate really is. Even more helpful, the tool helps you understand how much interest you'll be paying over time, and provides information on steps to reduce that expense.
The website also includes several well-designed checklists, guides, information sheets, and other tools that make the mortgage process easier to understand. Homebuyers in 2016 should take full advantage of these powerful, new tools.
Better access to credit in rural and underserved areas
For homebuyers interested in buying in rural or underserved areas in 2016, new rules that go into effect on January 1 will make that process much easier. The new rules do this by loosening some of the requirements created in the aftermath of the crisis for small creditors that serve these areas. This change should both increase the number of rural area lenders, and free existing ones up to make a wider variety of loans.
On January 1, the CFPB will expand its definition of what constitutes a "small creditor," expand its definition of "rural areas," and relax some of the standards required to maintain "small creditor" status for lenders serving rural and underserved areas. It will also expand the definition of a "qualified mortgage" to include certain loan types more prevalent in rural and underserved areas.
For example, a small creditor serving rural communities will be allowed to make mortgage loans that include a balloon payment as qualified mortgages under the "Ability-to-Repay" rule. These loans are more common in rural areas, and allowing small creditors access to this loan structure should facilitate more mortgage lending in these underserved areas.
The effect should be an increase in small creditor lending, and easier access to credit for individuals and families living in rural communities.
Lots of changes to protect consumers from a financial crisis repeat
Since 2008, regulators have been hard at work devising changes to improve the ability of Americans to obtain mortgages, while at the same time, ensuring banks don't make loans to individuals who can't repay the debt. This includes simplified forms, standardizing acceptable risk profiles, and improving borrower education.
If you're a prospective homebuyer in 2016, most of these changes will be fully implemented as you make an offer and apply for your loan. The new processes, easier forms, and robust education tools are there for your benefit. Take advantage of them.