RISMEDIA, Feb. 12, 2008-(MCT)-The foreclosure crisis is focusing new attention on the need for consumers to understand what they are signing when they take out a loan to buy a home.Clearly, some salesmen misled some consumers. But there’s reason to believe other consumers didn’t carefully read what was put in front of them.
Buying a house is a foreign exercise for first-timers. But knowing in advance the importance of key documents can keep you from taking on more debt than you can afford or getting stuck with added costs and heartache.
The first rule is to take whatever a lender or loan broker tells you with a grain of salt. In real estate deals, only what’s on paper is enforceable.
Because buying a house can be complicated, Congress passed two key laws to protect consumers.
The Truth In Lending Act, enacted in 1968, is intended to ensure consumers are made aware of the terms and costs of credit so they can compare offers from lenders.
The Real Estate Settlement Procedures Act, enacted in 1974, requires lenders to explain in writing the settlement process and the resulting fees. Lenders must provide a fair estimate of the costs at the beginning of the process and an accurate itemization again at the end, or at closing.
Here are some of the most important documents that experts say you should have at least a working knowledge of when you buy a home:
–Good faith estimate: This provides a rough estimate of the interest rate you will pay along with fees and other expenses associated with your loan. These costs normally include fees paid to third parties, such as appraisers, the recorder’s office, title companies, inspectors, and other legitimate processing costs.
But you should be careful of what experts call “junk” fees, unnecessary costs some unscrupulous lenders stick in to make a quick buck.
You are supposed to get it within three business days of applying for a loan. A caveat is that a good faith estimate is only that, an estimate. Charges at closing could still be higher.
Still, attorney Mike Vaughn says it affords an early way to compare the charges of one lender against another.
–Truth in lending statement: This should tell you clearly how much the loan will cost you by the time you pay it off over 30 years or whatever the term of the loan happens to be.
It should also tell you the annual percentage rate, the exact amount you are borrowing and how much you will have to pay each month over the life of the loan. In addition it should clearly state whether or not there is any prepayment penalty for paying off your loan early.
“You need to carefully read this before you complete your closing,” said Pam Hider Johnson, a senior housing counselor at the Greater Kansas City Housing Information Center, a Housing and Urban Development-certified home counseling agency.
Johnson said many first-time subprime borrowers with shaky credit got in over their heads because they listened to unscrupulous loan brokers who told them they didn’t have to pay attention to the truth in lending statement.
–Settlement statement or HUD-1 disclosure: This document provides a complete accounting of the transaction. In other words, it explains where all the money is going and how much.
If the terms look different from what you were told, you need to ask questions, said Chris Collins, president-elect of the Kansas City Regional Association of Realtors.
You have a right to see this document a day before the closing so you can go over it more carefully.
Understanding these documents is only a good start, however, Collins said. A buyer needs to understand how insurance and taxes can add to the loan payments.
And there is also the need for an inspection and understanding how a mortgage works. That’s why experts say first-time buyers should first take a course in home buying or hire a professional they can trust to help walk them through the process.
Copyright © 2008, The Kansas City Star, Mo.
Distributed by McClatchy-Tribune Information Services.