Loans Just Aren T What They Used To Be

Loans Just Aren't What They Used to​ Be
There have been some recent changes regarding federal loan payment options .​
a​ guidance report was published on​ September 29,​ 2018 that spoke on​ the​ issue of​ mortgage payment options available to​ the​ public .​
The Federal Reserve,​ the​ Office of​ Comptroller of​ the​ Currency,​ the​ Federal Deposit Insurance Corp,​ the​ National Credit Union Administration,​ and the​ Office of​ Thrift Supervision all contributed to​ the​ the guidance report.
Each of​ the​ regulators mentioned above acknowledged that both,​ interest-only mortgages and the​ popular payment option (also called Pick and Pay) are legitimate forms of​ home financing .​
The popular payment option (Pick and Pay) allows the​ borrower to​ chose which level of​ monthly payments they wish to​ pay .​
This would normally give them the​ option to​ pay,​ Interest Only this option does not reduce the​ principal balance that is​ owed on​ the​ mortgage .​
This allows you​ to​ dodge the​ principal reduction by cutting the​ payments from the​ first three to​ ten years .​
At the​ end of​ that period the​ borrowers have the​ same balance they started with but then they have higher payments to​ reduce the​ debt over a​ shorter time frame .​
Then there is​ the​ fully-amortizing plan (P & I) that includes both the​ interest and the​ principal.
The regulators pointed out so long as​ the​ borrowers know what they are getting into,​ either of​ these loans are fine .​
However lenders tend to​ mass market the​ loans with a​ variety of​ add ons and it​ could be a​ bad combination .​
The government can foresee that there are problems lenders should try to​ avoid.
According to​ the​ report the​ biggest issue lenders should want to​ stay away from is​ lending to​ those who cannot support the​ full cost of​ the​ loan .​
When a​ mortgage is​ extended at​ a​ rate of​ 1% or​ 2% when we are in​ a​ market of​ 6.5% to​ 7%,​ that is​ acceptable the​ report said .​
However that only works if​ the​ borrower can afford the​ repayments at​ the​ higher level if​ and when they become due .​
If they can't then extending the​ mortgage becomes a​ big problem .​
The report pointed out that just because the​ borrower can make the​ first few payments does not mean they can really afford the​ loan.
Lenders need to​ have documentation of​ the​ applicants' income and assets .​
This is​ often difficult to​ do for those that are self employed .​
Stated income underwriting makes payment-options and interest-only loans a​ very risky venture .​
If the​ bank does not confirm information that the​ borrower is​ claiming to​ be true then the​ lenders should be weary of​ future problems with the​ loan.
Piggyback plans sound good but can and normally are very damaging to​ the​ borrower .​
For example a​ borrower can apply for a​ payment option first mortgage of​ 80% and then open a​ line of​ interest-only credit for the​ other 20% of​ the​ property value .​
They will pay nothing down and have no monthly payment .​
But when those payments do kick in,​ it​ can and will be a​ huge payment shock .​
Lenders should be conscious of​ whether the​ borrower will occupy the​ property or​ not .​
If the​ borrower did not plan on​ living at​ the​ property the​ chances are higher that it​ could go into foreclosure or​ default.

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