Mortgage Loans Things everyone should know

Darin Domingue, CEM Deputy Chief Examiner Office of Financial Institutions

DEFINITIONS Mortgage - a pledge of property as security for a debt Mortgagee - the lender in a mortgage transaction Mortgagor - the borrower in a mortgage transaction Terms - details of how and when mortgage will be repaid or collected

DEFINITIONS Down Payment – a portion of the sales price paid to a seller by the buyer (difference between and sale price and loan amount) Equity – the difference between the current market value of property and the current mortgage balance Appraisal – an opinion or estimate of value Originator a person who obtains loan applications from consumers (loan officer)

DEFINITIONS Principal – the original amount borrowed, also the balance remaining on a loan Underwriting – analysis by lender to determine if the risk associated with a loan to a borrower is acceptable Loan to Value – ratio of the amount of the loan to the sales price or appraised value

DEFINITIONS Mortgage Broker – a firm or individual who for compensation matches borrowers seeking mortgage loans with lenders (does not use own funds to make loans) Mortgage Lender – a firm or individual who funds a mortgage loan to a borrower

DEFINITIONS Closing Costs – costs incurred to purchase real estate and/or obtain a loan secured by real estate Escrow – a deposit of money by a borrower with a lender to pay taxes and insurance when they are due Discount Point – 1% of loan paid to lender up front for a reduction in interest rate

DEFINITIONS Commitment fee – a payment from a borrower to a lender for the promise to loan money at a specified date in the future Lock fee – a fee charged by a lender to guarantee a particular rate as long as the mortgage closes by a specified date Term – period of time between commencement of a mortgage and its termination (10yr, 15yr, 30yr)

DEFINITIONS VOE – verification of employment VOD – verification of deposit VOM – verification of mortgage Credit report – report run by independent credit agency which provides information about a persons credit history and current standing with creditors

DEFINITIONS Fixed rate mortgage – a mortgage which the interest rate and payments remain the same for the life of the loan Adjustable rate mortgage – a mortgage which allows the lender to periodically adjust the interest rate in accordance with a specified index (ARM) Adjustment period – the length of time between interest rate adjustments on an ARM

DEFINITIONS Cap – limit on the amount the interest can change in one year and total over the life of an ARM Balloon payment – a scheduled payment that is larger than the periodic payments on a mortgage loan (usually the final payment) Point – an amount equal to 1% of the loan amount

DEFINITIONS Amortization schedule – a table showing the amounts of principal and interest dues at regular intervals and the unpaid mortgage balance after each payment Negative amortization – an increase in the principal balance of a mortgage as a result of periodic mortgage payments not covering the full amount of interest due

DEFINITIONS Hazard insurance – coverage which provides compensation to insured in the case of property loss or damage Flood insurance – coverage that reimburses policyholder for damage to property caused by flood Forced placed insurance – insurance obtained by lender to protect its interest when borrower has failed to obtain or maintain insurance

DEFINITIONS Mortgage insurance premium – amount paid by a consumer to FHA for mortgage insurance to protect creditor in case of default Private mortgage insurance – coverage written by a private insurer which is paid for by the consumer and protects the lender against financial loss occasioned by default of the consume r

Disclosures & Closing Documents Good Faith Estimate(GFE) – a disclosure which estimates the amount a consumer will pay at or before settlement in order to obtain a mortgage loan Required by the Real Estate Settlement Procedures Act (RESPA) Must be given to consumer within 3 days from the receipt of a complete application

Disclosures & Closing Documents New GFE: Designed to simplify disclosure and make total costs to consumers easier to understand Origination fees cannot change from those disclosed on the GFE Cost of required services selected by lender or by borrower from a list provided by lender cannot increase by more than 10% (appraiser, title insurance, flood certification, credit reports, etc.) Cost of required services selected solely by consumer can increase without limit

Disclosures & Closing Documents 3 page document: Page 1 lists: Date that GFE is good until Date that estimate of charges is good until How long lock period is Summary of loan including amount, term, prepayment penalties, variable rate Y/N, balloon payment and amount, and if an amount monthly payment can rise including maximum over life of loan Escrow information Summary of settlement charges

Disclosures & Closing Documents Page 2 details: Origination charges Adjusted origination charges Charges for all other settlement services Page 3 provides: Lender optional loan comparison table Shopping Cart for consumer to compare other loan costs

Disclosures & Closing Documents Changed circumstances will allow for variances in actual cost from estimates provided that lender provide a new GFE within 3 days of change Examples: borrower requested changes, Acts of God, war, disaster, inaccurate information provided by borrower, boundary dispute, environmental problems, et.

Disclosures & Closing Documents Truth In Lending Disclosure (TIL) – a required disclosure which lists: Finance charge Amount financed Annual Percentage Rate Total of payments Itemization of amount financed Required by the Truth in Lending Act (TILA) Must be given to consumer within 3 days from the receipt of a completed application

HUD Settlement Statement Borrower has the right to a copy of the settlement statement 24 hours prior to closing HUD-1 used for purchase transactions involving a mortgage loan (can also be used for refinance transactions) HUD-1A used only for non-purchase transactions Required for all federally related mortgage loans

HUD Settlement Statement Itemizes all amounts paid and collected in connection with a mortgage loan Shows how loan proceeds and settlement costs are paid and distributed Compares settlement costs with the GFE Provides a simplified descriptions of loan terms.

What to watch for People and Products For most people the purchase of a home is the largest and most important financial investment they will make Therefore it is worth the time and effort to shop and understand the loan products and associated cost Don’t let yourself be pressured into something you do not understand or are not comfortable with

What to watch for People and Products Make sure the loan you are going to enter into is appropriate for your needs Understand what you are signing including all the terms and charges Ask someone you trust other than your loan officer (another family member or friend)

What to watch for People and Products Don’t obligate yourself for years to make payments on a mortgage based upon what the loan officer told you You can trust but verify for yourself Be careful of a loan office whose primary focus and conversation is centered around how much can you afford for a monthly note

Home Purchase $32,000 Loan Amount$55,200 Loan Origination 4% $2,208 Broker Fee$1,387 Additional Hidden Fee$11,850 APPRAISED VALUE OF HOME $ Lender Assumed LTV80% Actual LTV173% Loan Closing DateAugust 31, 2000 Cash Sale September 6, 2000 Appraisal indicates property owned by applicants and no sales within last 12 months How much can you afford to pay each month?

What to watch for People and Products “I am in the business of putting people in homes” “I can get people qualified for a home loan when no one else can” “I am an entrepreneur” “How would you like an opportunity to make some money just for the use of your credit”

Investment & Builder Bailout Schemes Use of “INVESTOR’S” credit to obtain loan for construction, completion, or acquisition of a home Loans are represented to be owner occupied when in fact not intended to be Individuals recruited because have good credit No out of pocket money for investor Participate in profits from sale for use of credit Builder to make interest payments (construction) until complete

What to watch for People and Products “No credit, no down payment, no problem” “I know someone who helps people get the documents they need to get their loan approved” “Our loans are not like other lenders” “No other company has products like we do”

What to watch for People and Products “Our product is not like normal mortgage loans, it is designed for people like you to help them get into a home” Watch out for doublespeak If it does not make sense ask for an explanation If they can’t explain it so it makes sense then it may be a red flag Repeated use of buzzwords