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"Using the Services of a Mortgage Broker"
(Revised
by DRE January 2000)
Ref: http://www.dre.cahwnet.gov/mlbrkr.htm Introduction A home loan is a transaction in which you promise to repay money you have borrowed and also give the lender a mortgage on your home to secure repayment. In California, your promise to repay ordinarily is in the form of a promissory note and the mortgage is ordinarily in the form of a deed of trust. You need to make certain that you understand the terms of the loan before you become obligated. Whether you obtain a loan through a mortgage broker, a financial institution or some other lender, you should ask questions about the loan process and paperwork so that you understand the form of the transaction and the terms of the loan before you agree to them. The purpose of this brochure is to provide basic information about using the services of a mortgage broker which may assist you in making an informed decision when seeking a home loan. Using the Services of a Mortgage Broker A mortgage broker helps you obtain a home loan. A mortgage broker is generally a real estate broker licensed by the California Department of Real Estate. Mortgage brokers make or arrange first mortgages and junior mortgages. A junior mortgage secures a loan which is secondary or junior to one or more other loans on the property. Some home loans arranged through brokers are very similar to a home loan you might obtain independently from a bank, savings and loan association (S&L), credit union, finance company, or other type of lender. Some brokers offer shorter loan terms and/or different repayment plans. The Role of the Mortgage Broker The mortgage broker is usually an agent for the purpose of the home loan transaction. This relationship imposes a legal duty on the broker to disclose to you the material (important) facts you need to know about the loan. The broker has a duty of fairness and honesty to both you and the lender. These legal duties can be important in resolving disputes which arise after the loan is made, but the best way to avoid problems and disputes is to ask questions and be sure you understand the terms of the loan and each of the loan documents before you sign. When acting as an agent, the broker speaks for you in submitting your loan application to a lender. Make sure that you give the broker full and accurate information, and that any loan application or other document the broker prepares for your signature is accurate and complete before you sign it. Make sure you understand the terms of the loan before you agree to it. Mortgage Broker Commissions and Lender Fees Mortgage broker commissions and lender fees are not usually set by law. Compare fees charged by several lenders and mortgage brokers. You may be able to do this with a few phone calls. Ask about the amount of the fees and costs to be paid by you in cash before the loan is funded, the amount of the fees and costs to be paid from the loan proceeds or lender rebates, and the amount of fees and costs to be financed. What are Points? The term "points" customarily refers to the commission charged by the mortgage broker or the loan fee charged by the lender when the loan is made. Each point is 1% of the loan amount. On a $10,000 loan, 1 point is $100 and 10 points is a charge of $1,000. The amount of points charged is not usually set by law. You may wish to shop for a mortgage broker or lender who charges fewer points. You may be able to negotiate for lower points. Asking about points before you choose a mortgage broker or lender may save you money. You should be aware, however, that a "no point" or "zero point" loan may have a higher interest rate than a loan for which points must be paid. Therefore, it is important to compare the points, costs and interest rates in order to decide which loan is best for you. And remember, there is no such thing as a "no cost loan." What Other Fees Should I Ask About? The mortgage broker may charge you loan application processing fees. You may incur appraisal and credit inquiry expenses. However, if the mortgage broker asks for payment in advance for any service other than an appraisal or credit inquiry, call the DRE to see if the broker has approval to do so. Closing costs may include charges for document preparation, escrow services, title insurance, notary services, and recording fees. You may also be charged for fire or homeowner’s insurance coverage, optional credit life or disability insurance, or beneficiary statements. You do not have to buy credit life or disability insurance. Credit life and disability insurance benefits make your mortgage payments if you die or become disabled. Many credit life and disability policies have limitations, called exclusions, that excuse the insurer from paying under a variety of circumstances. Make certain you understand the terms of the policy and what it excludes. You can also secure financial protection from disability or death through standard term life insurance or disability insurance. Before you buy credit life or disability insurance, compare the cost with the cost of a term life or disability policy. Do My Costs Increase if I Borrow More Money? Many loan costs and fees are based on the amount of the loan. Usually, the more you borrow, the higher the costs and fees. Also, your costs and fees are limited by law on first mortgages under $30,000 and junior mortgages under $20,000 which are arranged through a broker. What is the Annual PERCENTAGE RATE (APR)? The annual percentage rate (APR) of interest includes both the simple interest rate and certain fees, commissions, costs, and expenses. By contrast, the simple interest rate, or note rate, does not include these costs and fees. If a broker or lender quotes an interest rate to you, be sure to ask if that rate is the simple rate or the APR. Use the APR to compare loans which have different simple interest rates, points and other loan charges. The loan with the higher APR usually will cost you more over the term of the loan. Debt Consolidation: Borrowing Money on My Home to Pay My Bills Be careful about using a home loan to consolidate debts in a single monthly payment. A home loan is different from other consumer debts. If you can’t pay most consumer debts, you might receive a bad credit rating, be sued, or even be forced into bankruptcy. But if you can’t pay your home loan, you could lose your home. Many consumer debts such as bills for credit cards or medical services are unsecured. Other consumer debts like car payments or furniture payments may be secured by an interest in the goods but not by an interest in your home. If you can’t repay consumer debts, the creditor may be able to take back the goods and sue you for the amount of the debt not repaid by the resale of the goods. But on a consumer debt, the creditor cannot simply foreclose on your home. If you pay off consumer debts like car, medical or credit card bills with a home loan, the new debt is secured by your home. This creates the risk that you could lose your home if you can’t make the payments. Consumer Checklist: Questions to Ask About Debt Consolidation
Paying Off a Balloon Payment Loan A balloon payment loan is not fully paid off through the monthly payments. A loan without a balloon payment is repaid a little bit each month. With these loans, each month’s payment applies to both interest and principal. They are called fully amortized loans because you pay off (amortize) the loan with your monthly payments. By contrast, an interest-only loan or a partially amortizing loan will include one or more balloon payments: i.e., payments that are twice or more the size of the regular payment. Partially amortizing and interest-only loans have lower monthly payments than fully amortizing loans for the same amount. In an interest-only loan, the monthly payments do not pay any of the loan principal. The payments cover only interest. The unpaid principal must be paid by one or more balloon payments. For example, if you obtain a $15,000 interest-only loan at 15% interest for 5 years, you must make monthly interest payments of $187.50. At the end of the 5 year term, however, you would still owe the entire $15,000 principal and it would be due in one balloon payment. (If you had made payments of $356.85 instead, the loan would have been amortized/paid off by the end of the 5 year loan term. If your loan was for 10 years, monthly payments of $242 per month would fully amortize it.) A balloon payment results when your monthly payments pay only interest (a non-amortizing loan) or when they pay only part of your loan principal (a partially amortizing loan). An example of each could look like this: $15,000 Loan Monthly Balloon 15% – 5 yrs Payment (Due After 5 Yrs) Fully Amortized $356.85 —0— Partially Amortized $280.00 $7,000.00 Interest Only $187.50 $15,000.00 With interest-only and partially amortizing loans, if you do not have the financial means to repay the balance of the loan principal as a balloon payment at the end of the loan term, your choices could include:
If you refinance the loan to pay the balloon payment, you typically must pay new loan fees and closing costs. This could increase your debt. If the debt becomes too large in comparison with the amount of equity in your home, you may not be able to further refinance. Then, if you are not able to satisfy the debt, you could lose your home in foreclosure or be forced to sell it to pay off the loan. Refinancing My Existing Fully Amortizing Mortgage Sometimes borrowers replace an existing mortgage with a new, larger first mortgage. Some things to consider in deciding whether to refinance an existing mortgage are:
Consumer Checklist: Interest-Only and Partially Amortizing Loans
How Do I Decide About the Length of Loan Term? The term of the loan is the number of years you have to repay it. First mortgages usually have terms of 15, 30, or even 40 years. Junior mortgages typically have terms of 1, 3, 5, or perhaps 10 or more years. With a fully amortized loan, the longer the loan term, the lower your monthly payments. With an interest-only or partially amortizing loan, a longer loan term means you have more time before you have to pay the balloon payment. In any event, the longer the loan term the more total interest you will pay, assuming you do not prepay the principal of the loan. How Do I Choose a Mortgage Broker and a Loan? Call lenders and mortgage brokers and ask about interest rates and fees for the size loan you need. Be sure to ask:
On an adjustable rate mortgage (ARM), the interest rate — and your monthly payment — may increase with an increase in the index used in your mortgage. In an ARM, the current interest rate is calculated by adding a fixed margin (such as 2%) to an index such as the Cost of Funds Index published by the Federal Home Loan Bank Board. INDEX RATE + MARGIN = MORTGAGE RATE. For adjustable rate loans, ask the lender or broker:
A good way to determine how much the fees and costs will be on a loan is to ask each lender or broker two questions: 1) "Approximately how much do I have to pay in cash before the loan is funded?" and 2) "What is the approximate amount of money I will have to borrow to end up with a certain amount of cash?" By comparing the answers you can find out how much you would have to borrow from each source to end up with the same amount of cash paid to you. What Do I Need to Know About the Loan Application? You will usually be asked to fill out a loan application describing your income, assets, debts and expenses, and the real property which is to secure the loan. Before you sign the application, make sure that it truthfully states your income, assets, debts and expenses. Never sign a blank application. Do not stretch the truth on your loan application. Don’t exaggerate your income or understate your debts. The lender is entitled to know your true financial condition. You may be asked to provide documents to the mortgage broker to verify your employment and bank accounts. The sooner you comply with these requests, the sooner your loan application can be processed. Consumer Checklist: The Loan Application
Using the Mortgage Loan Disclosure Statement In most cases, a mortgage broker must cause to be delivered to you a Mortgage Loan Disclosure Statement (MLDS) within 3 business days after you complete and present to the mortgage broker a written loan application or before you become obligated to take the loan, whichever is earlier. Ask to receive the statement as soon as possible and read it carefully. It will provide you with the following information about the loan:
Compare the line on the statement showing the amount of the principal with the line stating the amount of cash which will be paid to you. The difference between these two numbers is the amount of fees and costs which will be financed as part of your loan debt. The statement must also include estimates of the maximum costs of arranging the loan. It must list the estimated amount of each of these fees, if they apply:
The disclosure statement should also list any existing loans or liens against the property. If you expect the new loan to pay off a debt, check to be sure that debt is listed. Be sure to ask for this disclosure statement before you sign the loan papers. You do not become obligated to accept the loan until you sign the loan agreement or promissory note. If the disclosure statement does not describe the terms that you expect or want, don’t sign the loan papers. If the loan transaction is federally related, you may not receive an MLDS but you should receive a Good Faith Estimate conformed to California disclosures and certain Truth-in-Lending disclosures. These are federal disclosures which together generally provide the same information as the MLDS. (See discussions below regarding RESPA and the Truth-in-Lending Act.) If the broker does not provide the MLDS, he/she must separately advise you of any compensation received or expected from the lender and whether the loan includes a balloon payment. Get It In Writing Do not be afraid to ask the mortgage broker or lender to show you where the loan papers describe any particular features of the loan which have been promised to you. If the terms you have been promised are not there, ask the mortgage broker or lender to put them in writing. Promises made only orally may not be enforceable. Real Estate Settlement Procedures Act (RESPA) The Real Estate Settlement Procedures Act (RESPA) is a federal law administered by the U.S. Department of Housing and Urban Development (HUD). RESPA only applies to federally related loans and requires, among other things, that mortgage brokers provide detailed information on settlement costs so that buyers and borrowers can shop around for settlement services. Mortgage brokers and lenders must provide a good faith estimate of costs the borrower is likely to incur at close of escrow. The broker must present this estimate not later than 3 business days after receipt of a written loan application. The estimate will contain information similar to the Mortgage Loan Disclosure Statement required by California law. In some cases, a broker may use one disclosure form to comply with both the state and federal requirements. Your Rights Under the Federal Truth-in-Lending Act The Federal Truth-in-Lending Act (TILA) applies if the broker makes the loan with its own funds or arranges the loan for a lender who makes five or more home loans per year. If the TILA applies, the lender must provide you a disclosure before you become obligated which tells you: the identity of the creditor; the amount financed; that you have a right to an itemization of the amount financed; the dollar amount of the finance charge; the finance charge expressed as an annual percentage rate (APR); the number, amount and periods of payments; the total of all payments; any late payment charge; and whether or not there is a charge upon prepayment of the loan principal. The disclosure statement must also identify the property which is to secure the loan and should tell you whether the terms of the loan permit assumption of the loan by someone buying the property from you. If the TILA applies, you may have a right to rescind (cancel) the loan within three days after certain events, including the consummation of the loan transaction. When you do not receive proper disclosures about the loan, the right to rescind can last as long as three years from the time you obtain the loan. Any request to rescind the loan should be made in writing. The TILA right of rescission does not apply to all loans arranged by mortgage brokers, so do not rely on the possibility of later rescission as a substitute for careful study of the loan before you agree to it. The TILA was amended in 1994 with respect to certain loans, other than purchase money loans, secured by the borrower’s principal dwelling. In these "high rate/high fee" loan transactions, also known as "Section 32" loans, the TILA now places some additional restrictions on creditors, requires more disclosures, and gives borrowers cancellation rights. The amendment defines a creditor as someone who, in any 12-month period, originates more than one high rate/high fee loan. Also, any such loan arranged by a mortgage broker is subject to the new requirements. A high rate loan is one in which the APR exceeds by 10 points or more the yield on Treasury Securities having a similar term. A high fee loan is one in which the total points and fees exceed the greater of 8% of the loan amount or, as of 1-1-00, $451.00 (adjusted annually on January 1 based on the change in the Consumer Price Index). The TILA is enforced by the Federal Trade Commission (FTC). The FTC will answer questions concerning the TILA and high rate/high fee loans. The Loan Documents: What Do These Papers Mean? The mortgage broker should explain the loan to you, but you can also help avoid misunderstanding by reading the documents and asking questions. Don’t guess at the meaning of the loan papers. Ask the mortgage broker to explain them. Consumer Checklist: Understanding the Loan Documents
Signing the Papers: What to Expect When the time comes to sign the papers, several documents will be presented to you. They will probably include: Promissory Note. In the promissory note, you promise to repay the money borrowed. The note should state the amount you are borrowing, the interest rate, whether and how that interest rate may change, the term or length of the loan, and the amount of any balloon payment. Deed of Trust. The deed of trust gives the lender a lien on your home. It also gives the lender the right to foreclose on your home if you don’t repay the loan. Escrow Instructions. The escrow instructions tell the escrow holder how to pay the loan funds. If existing mortgages or other debts are to be paid off by the loan, be sure that the escrow instructions tell the escrow agent to pay off these debts. Broker Agreement. Read the broker agreement carefully. Does the agreement require you to pay the broker’s fee even if you don’t receive the loan you requested? Make sure the agreement is consistent with what the broker has already told you about your rights and obligations. Declaration of Oral Disclosures. This is a statement that the broker has orally explained certain terms of the loan to you. Before you sign a paper saying that you have received explanations, make sure that you have received the explanations and that you understand what you have been told. Mortgage Loan Disclosure Statement. The mortgage broker must give you this statement, which sets forth the loan terms and estimated costs, within 3 business days of receiving your completed written loan application or before you become obligated to complete the loan transaction, whichever is earlier. If liens or debts are to be paid off by the loan, be sure they are listed on the disclosure statement. (In lieu of the MLDS, in a federally related loan transaction you may only receive Truth-in-Lending disclosures and a Good Faith Estimate of costs conformed to California disclosure laws. See "Using the Mortgage Loan Disclosure Statement" above.) Truth-in-Lending Disclosure Statement. Some, but not all, mortgage brokers must give you Federal Truth-in-Lending Act disclosures about the cost of the loan before you become obligated on the loan. Take your time and read each document carefully. Consumer Checklist: Signing The Loan Papers
Mortgage Insurance: Notice to Borrower Civil Code Section 2954.6 requires that if private mortgage insurance (PMI) is a condition of a loan the lender must notify the borrower whether the borrower has the right to cancel the PMI and, if so, what conditions must be met in order to cancel. Servicing: Making Your Monthly Payments It is very important to make all your payments and to make them on time. Your promissory note may include a provision requiring you to pay a late charge for each late payment. For some home loans, the law allows a late charge of up to 10% per installment. The person who collects your loan payments is often referred to as the authorized servicer. Sometimes this is the mortgage broker. NOTE: Civil Code Section 2937 requires that if the servicing responsibility for a loan is to be (or has been) transferred, both the current and new servicer must notify the borrower of the change and its effective date. What Should I do About a Dispute with the Authorized Servicer? If you have a disagreement with the authorized servicer about your loan, write a letter to the servicer and keep a copy. State what the problem is and what you wish the servicer to do about it. Be specific. If your payment wasn’t credited, give the account number, amount, date, and number of the check. Do not send your original documents such as canceled checks. Keep all the originals and send copies with your letter. Confirm in writing any telephone conversations with the servicer. If you don’t receive a satisfactory response and the servicer is required to be a licensed real estate broker, you can file a complaint with the Department of Real Estate. Foreclosure: What Should I Do Now? In foreclosure, a person called the trustee in foreclosure sells your property at a public auction sale. Common reasons for foreclosure are failure to make monthly mortgage payments or failure to make a balloon payment when due. Foreclosure proceeds in stages. It begins with a notice of default which tells you why you are now in default. You then have until five business days before the foreclosure sale to cure the default. To cure the default you have to pay off missed payments, late charges, and fees for initiating the foreclosure. If you do not cure the default, the trustee can take steps to hold a foreclosure sale. You have the right to one 24-hour postponement of the sale if you make a written request to postpone which states that your purpose is to obtain the cash to pay the debt and which identifies the expected source of the money. Detailed rules govern foreclosure. Don’t wait until a foreclosure sale is scheduled to seek legal assistance. If you receive a notice of default, act on it promptly. See if you agree with the amount the trustee says is due. If you do not believe you owe the amount claimed, write a letter as soon as possible disputing the amount, with copies of the proof of payments. Ask for a written correction and follow up with the authorized servicer to see that your account is corrected. If you owe the money, think about how to repay it and cure the default. Are you able to borrow money from family or friends? Could you repay the amount of the missed payments over a period of several months? The lender is not required to allow you more than three months to pay off the default, but a lender may give you more time if you have a definite plan for repayment. If the lender agrees to give you more time to repay the loan, that agreement should be in writing. These agreements are commonly known as work out agreements. When there is no way to repay the debt, you should consider selling your home before you lose it in foreclosure. Selling the home may allow you to save your equity and protect your credit. This may help you in relocating to a new home. "Foreclosure consultants" or "foreclosure specialists" often contact homeowners who have received a notice of default. They may claim they can prevent the foreclosure, and may even suggest that you transfer title to your home to them. Persons who contact you and claim they can prevent a foreclosure should be questioned carefully to determine how they believe that this can be accomplished. Consumer Checklist: Foreclosure
Can I Find Out Why Credit was Denied? Lenders may not base a decision to deny you credit on your race, color, religion, national origin, ancestry, sex, marital status, or the fact that some of your income comes from a public assistance program. The lender is required to inform you in writing of an adverse action (denial) taken on your application. If you make a timely written request, the lender must also tell you in writing why credit was denied. Information and Complaints The Federal Trade Commission publishes free pamphlets on home mortgages. The California Department of Real Estate (DRE) can tell you whether a mortgage broker has a current license, how long the broker has been licensed, and whether the Department has ever taken any formal disciplinary action against the broker. This information can also be accessed through the DRE’s Web Site at www.dre.ca.gov. Private attorneys. The county bar association in many counties gives a referral to lawyers who have asked to be listed with the bar referral service. Legal Aid. If you are on a fixed income or have a low income, you may qualify for a lawyer through the county Legal Aid Office.
American
Mutual Mortgage Office: (818) 654-9790 Email: info@AmericanMutualMortgage.com
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© 2000 American Mutual Mortgage. All Rights Reserved. American Mutual Mortgage is licensed by the California Department
of Real Estate, License #00882327
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