A new mortgage law in Georgia offers extra protections to people with bad credit looking for home loans. In the past, some bad credit lenders in Georgia were able to make loans to people who could not afford to repay them, and they were able to overcharge for these loans too. Senate Bill #57 has been passed and sent on to the Georgia State House of Representatives for approval. Here are two important protections the bill as written would provide:

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First, the new bill will not allow people to borrow more than they can repay. If your debt-to-income ratio is over 50%, that is, more than 50% of your gross income would be needed for your mortgage, property taxes, homeowners insurance, HOA dues, credit card bills, student loans, car loan payments, and other consumer debt, you will not be able to get a loan in Georgia. While consumer groups felt that the ratio should be lower, Rep. Jay Powell said that too much restriction would cramp the already-subdued Georgia housing market. Currently, there are 90,000 foreclosure properties there that need to be moved before the real estate market can recover.

In addition, the bill addresses the payment of yield spread premiums (YSPs). YSPs are paid to mortgage brokers by wholesale lenders for finding borrowers willing to pay higher than market interest rates. In most cases, the borrowers understand what they are doing and choose this option -- in exchange for taking on a higher interest rate, they get a mortgage with reduced or zero loan fees. The YSP is used to offset some or all of the costs of getting a mortgage. However, a less savory practice involves brokers who charge the borrowers full fees while collecting a YSP from the lender and pocketing it themselves. The borrowers get a higher interest rate but don't receive the offset in loan fees. This will no longer be allowed in Georgia if this bill passes as written. YSPs will not be collected unless used to offset borrower costs.

How Does this Affect You if You Don't Live in Georgia? Keep Reading -- It Does!

You don't need your state Senators and Representatives to do for you what you can do yourself. If your mortgage broker gets a YSP there is no reason he or she should ever get to pocket it. It's disclosed on your Good Faith Estimate (GFE) when you apply for a mortgage (or provide certain information to lenders if you're just shopping). It's also disclosed on your settlement statement when you close on your home loan. Don't sign your loan documents if there is a YSP and it isn't credited toward your loan costs. For example, if there is a 1-point YSP, there should also be a 1-point credit, perhaps offsetting your loan origination charge.

Shopping for your mortgage is the best way of making sure you aren't being taken advantage of. For example, if one lender charges you no points or fees, and another charges you origination and other fees for the same interest rate, chances are there is a YSP that isn't being passed on to you.

Direct lenders don't have YSPs but they may still over-charge. You won't see a YSP on a statement from a direct lender, and many (but not all!) of them have policies against loan agents making extra commissions (called overages) by charging higher mortgage rates. But some loan officers do get extra commissions by getting borrowers to pay more than the going rate. The answer? Again, shop for your mortgage and compare several deals. Ideally, you'd shop with at least one direct lender and one broker.

Avoid taking a loan you can't afford. Responsible bad credit mortgage lenders don't make loans that can't be repaid. But ultimately YOU are the one responsible for anything you sign. Your GFE will tell you if your loan payment or mortgage balance can increase over time and how high it can go. Make sure this amount, plus all your other bills, won't exceed 50% of your pre-tax monthly income. Keep in mind that you know your situation better than a lender. If you know retirement or college is around the corner, figure in the income reduction or increase in expenses when determining if a payment is truly affordable to you.