How the Financial Reform Bill Could Change Mortgages

As members of the House and Senate begin to duke it out in an attempt get a final bill on President Obama's desk before the July 4th break, many Americans are left wondering what this bill would mean for them. The need for financial reform partially stems from the subprime mortgage crisis, however few people are aware of exactly what impact financial reform could have on mortgages. While the House & Senate work to merge their versions of the bill, it's important to be aware of the details that could have an impact on your mortgage.
No more "no doc" loans
Both bills prohibit issuing loans to borrowers without verifying that the person will have the means to repay. Lenders will be required to document income and confirm by any possible means that the borrower will be able to repay their loan. Many lenders have stopped issuing "no doc" loans, but the bill, if passed, would legally prohibit these types of loans.
No penalty for prepayment
It used to be that when homeowners tried to refinance or pay their mortgage off early, they were hit with hefty penalties and increased payments. Both bills would begin to restrict these penalties, and they would be restricted completely on adjustable-rate, subprime or other loans that are based on uncertain characteristics. The penalties for paying off a loan earlier than scheduled will be limited to a maximum of three years and 3% of the outstanding loan balance. Most legitimate lenders do not charge borrowers a prepayment penalty.
No bonus for putting people in higher rates
Some less credible mortgage brokers and loan originators have steered home buyers to more expensive loans, regardless of if they qualify for a lower rate. Both the House and Senate versions of the bill prohibit any financial incentives for putting borrowers in loans with higher interest rates than they qualify for. Currently, both versions of the bill would make this practice illegal.
It's still too early to tell exactly what measures are going to make it into the final version of the bill. The good news is that most trusted mortgage lenders avoid many of these practices without being required to do so by law. That's why it's more important now than ever to work with a lender you trust when you are applying for a home loan or a mortgage refinance.

Jordan Fylonenko is a writer with Quicken Loans who specializes in articles about Mortgage Rates, Home Loans, Refinance and other home-buying related information.