Were you financially unprepared for the housing crash? Are you still dealing with bad credit despite your steady income? A newly proposed mortgage loan might be an answer to your real estate woes. Although Illinois has yet to see the same decrease in foreclosures that many other states are beginning to experience, future mortgages for those who were hard hit by the downswings of the economy may seem out of reach. However, according to The Chicago Tribune, housing advocates are promoting a new kind of sub-prime loan that could have positive long-term effects.
What is the Dignity Mortgage?
Renamed the “Dignity Mortgage,” this type of loan is intended for potential buyers with lower incomes and lower credit scores. The borrowing terms still begin with “the classic sub-prime tradeoff: a higher rate for a higher-risk clientele.” In fact, a recent article in the National Mortgage Professional Magazine colloquially described the loan as “sub-prime with training wheels.” Yet, while loans of this type begin with higher sub-prime interest rates, those same rates would later be reduced when the borrower makes timely payments. In short, the Dignity Mortgage works on a “good behavior” system: it starts with a high interest rate, but it rewards you by lowering your interest rate as long as you consistently make on-time payments.
The idea for the dignity mortgage comes as a response to the increasing difficulty in obtaining a home loan. As Illinois and the nation continue to feel the effects of the housing crash, access to homeownership is a serious concern. Housing advocates specifically cite the need for a growth in homeownership in families with steady incomes who still fall within the low- to moderate-income brackets—groups that are noticeably underrepresented in the Federal Reserve home-lending statistics. The dignity mortgage is intended as a homeownership solution.
What are the Long-Term Effects?
Housing advocates see only positive outcomes with the dignity mortgage proposal, since the terms of the loans preclude many of the problems that led to the housing crash in the first place. An article in American Banker indicates that dignity mortgages, unlike many of the harmful subprime loans that are now associated with foreclosures across the country, require credit counseling programs and proof of income before borrowing. Additionally, the loans would require a 10% down payment—no more 100% financing. A dignity mortgage could help you to “buy the home you need, not the home you may want.”
What does a loan like this mean for you in terms of costs, payments, and interest rates? At the start of the loan, most borrowers will pay 1.25% more than the average good-credit borrower. For example, a borrower with excellent credit might have an interest rate of 3.5%, while a dignity mortgage borrower may start with a 4.75% interest rate. However, after only five years of consistent on-time payments, you could find yourself in the position of borrowers with nearly perfect credit and a large initial down payment: a 3.5% interest rate for the duration of your loan. Although these mortgages have yet to be approved by lenders, housing advocates insist that these loans could help to increase homeownership while preventing future foreclosures. Are you are currently at risk of foreclosure or reconsidering your homeownership options? Contact a real estate attorney today to discuss your options.
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