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Mortgages 101 – Tips to Help Clients Avoid Pitfalls

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By Vicki Lee Parker

RISMEDIA, Sept. 10, 2008-(MCT)-The days of getting a home loan without proof of a paycheck or any indication of your financial health appear to be gone. But that doesn’t mean the process is any less confusing or that all lenders are completely trustworthy.

“Borrowers should be taking the same care as they did two years ago,” said Chris Kukla, senior counsel for government affairs at the Center for Responsible Lending in Durham. Kukla warns particularly of predatory lending practices that can saddle homeowners with more debt than they can handle.

But many potential home buyers just need help navigating the changing mortgage landscape caused by lenders trying to control the damage of the subprime crisis.

For instance, some have eliminated seller-paid down-payment assistance. Others are changing loan criteria, including credit score requirements and the amount of down payment required.

“The underwriting guidelines change on a daily basis,” said Chris Corchiani, owner of DNJ Mortgage in Cary. “The loan you could do last week, you can’t do today.”

The key for most home buyers is to do their homework before shopping for a loan and remember that they can shop around.

For instance, Jessica MacDougall and her husband passed on the first mortgage broker they talked with about financing their Clayton home.

“He was very short with us on the phone,” Jessica MacDougall said. “He just said, ‘Let me pull your credit report, and I’ll get back to you.’ I got the feeling that if our credit wasn’t good, he wasn’t going to work with us.”

They asked their real estate agent for references and started making phone calls and asking questions. They picked a broker who helped them figure out what the family could afford. “She explained everything,” MacDougall said.

Ultimately, that is the most important thing when you want to buy a home: understanding what you can afford and what you’re getting.

To help you on that path, here is our Mortgage 101 guide.

Know Your Rights

Over the past two years, state legislators have passed several laws aimed at helping homeowners. Some highlights:

- It is illegal for a broker to receive additional compensation, such as a bonus or commission, for inflating a loan value. That includes setting a higher interest rate than the borrower qualifies for.
- An emergency program reduces foreclosures and provides relief and counseling to people with subprime mortgages who face foreclosure. The new law requires that lenders give homeowners and the N.C. Banking Commission 45 days’ notice before a foreclosure is filed. It also gives the commission the power to negotiate with lenders on behalf of the consumer.
- The state’s Home Protection Pilot Program has been expanded to all 100 counties. The four-year-old program tries to help workers keep their homes if they lose their jobs by providing interest-free bridge loans.
- Any home loan servicer must clearly explain certain fees to a homeowner within 30 days of the fees being charged. There is a cap on the amount of points and fees that can be charged to a loan.
- Mortgage fraud penalties are now tougher, and it’s easier for prosecutors to bring charges against mortgage sellers who lie or intentionally leave out information.

Before Starting Your House Hunt

There are many resources and Internet sites that help borrowers understand mortgage lending.

If you are shopping for a loan or planning to soon, here are some tips:

- Meet with a housing counselor first. This is a critical for first-time home buyers. It may take some time to get an appointment, but it’s worth the wait. They will tell you about available programs and give you a reasonable estimate of the fees and interest you will have to pay. For a HUD-approved counselor, visit www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm.
- Get prequalified. Have a lender pull your credit report and determine how much money you qualify to borrow. Do this before you start looking at homes. You don’t want to fall in love with a home that’s worth $150,000 when you can only afford $90,000.

Before You Sign On The Dotted Lines

- Have a lawyer or a financial counselor you trust look over your loan documents before closing. Lenders are required to give you a good faith estimate before you close. Read over the fees and charges closely. Make sure that all the terms and conditions you agreed to are reflected in those numbers.

For example, if the seller agreed to no closing costs, make sure the costs are in the seller’s column and not rolled into your mortgage. If the lender promised not to charge you for the appraisal, make sure it was not added to your costs. If the builder promised to give you a discount, make sure those amounts are clearly shown in the documents. If you were promised a gift card to a home improvement store, make sure it’s presented at closing.

Once you sign the documents, you have little leverage to go back and request anything that wasn’t included in a written agreement.

- Don’t be afraid to walk away from the closing table. Lenders have a right to change the fees up until closing. If the amount is significantly different from the amount listed in the good faith estimate, ask why. If you don’t understand the answer or you disagree, you are free to leave the table.

Questions to Ask

Though there are new laws to help protect borrowers from unscrupulous mortgage brokers, consumers need to be on guard against predatory lending practices. They also must understand just what they’re getting themselves into. Here are some things to consider:

- Find out whether property tax and insurance is included in the escrow. If not, you’ll have a lower monthly payment, but you’ll need to budget for those payments yourself. They don’t go away.
- If the broker suggests spreading your mortgage payments over 40 years for a smaller monthly payment, ask to see how much more interest you’ll have paid before you agree. Make sure you’re comfortable with that.
- Find out what broker fees are typical in your market and make sure you’re not being charged more.
- Be wary of delayed closings. Your agreed-upon rate could expire if your original closing date isn’t met.
- Compare your potential home’s appraisal with others ones in the neighborhood. If it seems too high, ask questions. Exaggerated property appraisals can allow excessive fees to be included in the loan and result in you owing more than the home is worth.
- Never sign blank documents.
- Make sure you have a good faith estimate that outlines fees and payments before the closing date.
- Be careful if you’re offered a no-down-payment loan. Some brokers will split the mortgage into two loans, with one having much higher costs. Make sure you can afford both loans.
- Read the fine print. Watch out for terms that could make it harder to refinance, such as prepayment penalties.

How to Improve Your Loan Terms

There is still hope for people who are trying to refinance high interest loans or loans on homes that have lost a significant amount of equity.

Jeff Williams, mortgage consultant and owner of Allied Home Mortgage in Raleigh, said troubled homeowners can try the following:

- Refinance to a FHA type loan if you have at least 5% equity. Most lenders now require at least a 580 credit score for an FHA loan.
- Apply for a FHA secured loan where the lender, or original note holder, agrees to write off the amount of indebtedness that cannot be refinanced into the new FHA mortgage. This is similar to a short-sale, where the lender agrees to let the borrower sell the house for less than it’s worth.

The lender may also decide to provide subordinate financing, or a second mortgage.

- Borrowers can apply for the FHASecure program, a temporary initiative to permit lenders to refinance delinquent adjustable-rate mortgages or offer new second mortgages where the combined loan-to-value ratio exceeds the acceptable FHA standards. However, it is difficult to meet the criteria for this program. For example, one provision says that the borrower could have no more than two 30-day or one 60-day late payment in the past 12 months.

Copyright © 2008, The News & Observer, Raleigh, N.C.
Distributed by McClatchy-Tribune Information Services.

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