Inside the New Bad Credit Florida Mortgage Guidelines

It won’t mean the end to stated-income loans or high-risk mortgages for subprime buyers, but new guidance from regulators will certainly cut down their availability considerably.

In a long-awaited policy statement on loans to borrowers with imperfect credit, financial regulators urged banks, credit unions and Florida mortgage groups to verify income, assets and employment.

This applies to all Florida home loans except in the special cases where borrowers could demonstrate substantial financial reserves.

The guidelines, which took effect immediately, also instruct lenders to underwrite adjustable-rate bad credit Florida home loan applicants at the “fully indexed” interest rates - not teaser rates.

During the housing boom, many lenders had lured credit-impaired home buyers into “2/28″ and “3/27″ adjustable-rate mortgages featuring discounted fixed payments for the first 2-3 years.

After the discount period, the Florida mortgage rates - and subsequently, payments - sometimes jumped by 50 percent or more, putting home buyers in serious jams.

Large numbers of those borrowers are now delinquent on their Florida home mortgage loan payments and at risk of foreclosure problems.

The new guidelines target other once-popular Florida mortgage lender practices, but while helping borrowers, they do not ban the loans outright.

For example, many subprime 2/28 and 3/27 adjustable-rate loans also carried heavy prepayment penalties - up to six months’ interest - so that discouraging borrowers from mortgage refinancing is part of the process.

Under the new guidelines, lenders will be required to give borrowers a “reasonable period of time” - generally 60 days or more - before the rate reset date to qualify for a mortgage refinance into a more favorable loan without penalty.

Regulators also stressed that lenders should only approve subprime loans “based on the borrower’s ability to repay the loan according to terms.”

That doesn’t amount to a formal “suitability” test, but it does require lenders to determine that the loan is appropriate to the applicant’s financial status and capacity to handle Florida mortgage payments.

The guidelines also instruct lenders to make certain that every subprime applicant understands the risks built into the loan itself, including higher costs in connection with any reduced documentation, prepayment penalties and the responsibility to keep track of tax and insurance payments if the loan lacks an escrow account.

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