Consumer advocates (including experts at LendingTree) have long advocated comparing mortgage offers from competing lenders when purchasing or refinancing a home. That hasn't always been simple or straightforward, but the mortgage comparison game has become easier during the past few years. That's a huge benefit because borrowers can now target their financing preferences with far greater ease.
The Bad Old Days
Go back to the "good old days" of mortgage financing -- the period from roughly 2000 through 2008 -- and the world of real estate financing routinely included opportunities to finance with no doc loans, the potential to buy with little or nothing down, and programs to avoid the purchase of mortgage insurance even if you paid little money upfront.
The old disclosure forms consisted of piles of boilerplate that almost no one read, which meant people sometimes paid too much for mortgages and didn't always understand the terms of the loans they chose -- which led to foreclosure in many cases. In addition, many commissioned lenders were paid more for putting borrowers into loans with less attractive terms.
The Good New Days
Those days are finished, and what we have today is vastly better. How do we know? Foreclosure rates are down to where they were before 2000, and that means investors who hate risk are pouring money into the mortgage marketplace. That's one reason we are seeing such low mortgage rates at the end of 2014.
Today's disclosures are easier to read and understand, with all the "gotcha" terms displayed front and center in large type. The new forms, combined with modern loan shopping tools like LendingTree's LoanExplorer, which displays real-time mortgage quotes that can be customized to the borrower's profile, make finding the best offer much easier.
With the ability to repay standard created under Wall Street Reform, lenders must verify the ability of residential borrower to repay the mortgage. The only way lenders can meet this standard is to have a nice, fat loan file showing that they've looked at the borrower's financial records. In other words, the "no doc" loan application is dead and gone.
How Wall Street Reform Helps Borrowers
Wall Street Reform -- the Dodd-Frank legislation and related regulations -- divides the universe of real estate financing into two areas: "qualified mortgages" and "non-qualified mortgages" or non-QMs. Most mortgages today are qualified mortgages (QMs) because by originating such loans, mortgage lenders have very little liability. That's a big deal because lenders have shelled out more than $150 billion in court settlements as a result of the foul loans which were part of the mortgage meltdown.
If you look at the basic standards for qualified mortgages -- QMs -- a lot of the mortgage comparison work has been done for you. For instance:
- QMs include VA, FHA and conforming loans as well as portfolio mortgages held by lenders. Exotic and toxic loan options are out.
- Loan terms cannot exceed 30 years (except some USDA Rural Housing loans).
- Loans must have substantially equal payments. That means balloon notes and loans with negative amortization -- such as once widespread option ARMs -- are out.
- The debt-to-income ratio is generally limited to 43 percent. In other words, if you have a household income of $6,000 per month, as much as $2,580 can be devoted to recurring payments such as mortgages, car loans, student debt and credit card bills.
- If the mortgage debt is $100,000 or more, lender points and fees are limited to three percent of the loan amount.
- Monthly payments must be substantially equal. That means balloon payment loans are not allowed.
- Prepayment penalties are allowed with QMs but in practice most loans -- FHA, VA and conforming -- do not have prepayment penalties. There can be prepayment penalties with portfolio mortgages, loans which lenders originate and keep. If there is a prepayment penalty, it's limited under Dodd-Frank to not more than two percent of the loan amount the first year, two percent the second year and one percent the third year. After that, no penalty is allowed.
- The lender gets certain benefits if the interest rate is not more than the "Average Prime Offer Rate" (APOR) plus 1.5 percent. This is why mortgage rates tend to be tightly grouped when you look for financing -- lenders want to avoid exceeding the Dodd-Frank limit.
Since qualifying mortgages have been largely homogenized under Wall Street Reform, a lot of the tricks and traps that once haunted mortgage borrowers are now gone. You still need to shop around, but now you can concentrate on such central issues as fixed versus adjustable, the interest rate and points, or whether you would be better off with a 15-year loan term or 30 year loan.
Mortgage Comparison With Non-Qualifying Home Loans
But what about those non-QMs? Is there any time you might want a non-qualifying mortgage?
For some borrowers the answer is yes. For instance, if you want an interest-only jumbo mortgage, you'll get non-QM financing. Such a loan can't be a qualified mortgage because the size is too large and the monthly payments are not substantially equal -- once the "start" period ends, monthly payments will increase because they are now more than just interest.
But even with non-qualified mortgages, a lot of rules apply. For instance, the lender must verify that the non-QM borrower has the ability to re-pay the loan, and with a non-qualified mortgage prepayment penalties are forbidden.