Financial Overhaul to Make Mortgages Safer but Harder to Get

Now that Senate and House negotiators have reached a compromise on new financial regulations, we know what will happen to the mortgage industry if the bill passes and how it will impact your ability to buy a house. Those freewheeling days of no-money-down, liar loans are dead. Instead you'll find more paperwork is needed to prove you truly can afford to make the payments.

If the final bill passes both houses of Congress -- still not a certainty, since Republicans are likely to try to block it -- homebuyers seeking a mortgage will face new minimum underwriting standards for home mortgages. The details of those standards are not yet available, but you can be sure that no-money-down loans will no longer be available, even in the private mortgage marketplace.

These no-money-down loans that were approved using stated income -- in other words, borrowers did not have to prove income -- will be history and against the law. Instead, lenders will have to verify borrower income to make a loan. Self-employed people will definitely find it much harder to buy a house, especially if they don't have two years of income tax filings to prove their income.
Also gone from the marketplace will be those commissions for brokers that reward them for steering borrowers into more expensive loan packages with higher interest rates. That's good news, since many borrowers were steered into more expensive subprime loans -- even though they could afford a prime loan -- because brokers often made higher commissions off the subprime option.

Other changes will help to make these rules stick. Especially the creation of a Consumer Financial Protection Bureau, which will be based inside the Federal Reserve. Fees from banks will pay for this agency, which will make sure unfair lending practices do not reappear in new, innovative forms. In addition to protecting you from unfair mortgage practices, the new agency also will be responsible for monitoring credit card and other lending. The key type of lending left out of its reach is automobile financing by car dealers.

You'll also be able to get one free credit score each year along with your free credit report. That score will allow you to test the waters and see whether you need to work on your credit history before applying for a loan. In today's marketplace you need a score of about 760 or above to get the best interest rates. If your score is below 680, you likely will find it difficult to get a loan with less than 10 to 20 percent down.

Now that you can get your score for free, you can see where you stand before applying for a mortgage. If your score is too low, take six months to a year to improve it so you can get the best rate possible, given your economic condition. The fastest way to improve your score is to pay all bills on time, reduce your debt and avoid applying for new debt until after you get your new mortgage.

The new Consumer Financial Protection Bureau will monitor actions of the banks. If they do try to get around the new law with new product innovations, the bureau should be able to respond more rapidly to market changes. This was supposed to be the responsibility of the Federal Reserve, which often seemed asleep at the switch when all the exotic mortgages -- negative amortization loans, interest-only loans, and no-down-payment loans -- that caused the housing meltdown were allowed to flourish.

Hopefully, the new laws that will be put in place with the new legislation will reduce the possibility of another period of outrageous lending behavior.

Lita Epstein has written more than 25 books including "The Complete Idiot's Guide to Personal Bankruptcy" and "The Complete Idiot's Guide to Improving Your Credit Score."


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