The Federal Government has passed laws that state every borrower has to receive a good faith estimate of costs and a truth in lending report within three days of filling out their loan application. Before the loan funds the borrower can get up to three of four more of these documents from the various bankers and lenders who touch the loan. The problem is they are a bit confusing and not user friendly. Most borrowers will not even look at these, except for a cursory glance. It is a big mistake, but an understandable one. Therefore I have inscribed a Borrowers Bill of Rights, that if followed, will save borrowers countless sleepless nights, a parcel of money and a lot of wasted years of mortgage payments. The following is the Borrowers Bill of Rights, as I see it :
1. Every borrower who is given a rate for a loan in writing with an APR is entitled to a complete explanation of the APR (Annual Percentage Rate). The APR should include all of the closing costs including any and all points charged. The points should be expressed in a numerical amount and also a dollar figure.
2. When a borrower receives a truth in lending on an option arm the borrower should be apprised of the negative amortization that will occur based on the interest rate at the time of the closing. The interest rate is almost always higher than the start rate(teaser rate) and when the negative is calculated the borrower will understand the true ramifications of negative amortization as it applies to his or her loan.
3. Prepayment penalties are most often misunderstood. When a borrower has a prepayment penalty it is imperative that the term of the penalty is spelled out before the borrower gets to the closing. The details of the penalty must also be stated for both sale and refinance of the property during the time frame when the penalty is operative.
4. A "no cost" loan should also have an example of a " no point loan " when being presented to the borrower so the borrower can determine the legitimacy of the statement.
5. All borrowers should understand that interest only loans are merely an option and not an actual loan. They should be shown how an interest only loan works including what happens to the balance and payment after a principal payment is made.
6. All borrowers should be told the steps that must be taken to go from an application to a completed loan including the time estimate for each step and the total time for the entire transaction. Borrowers should understand where delays may happen and who might cause them including themselves.
7. Borrowers purchasing a house should understand that closing costs, exclusive of points, will always be less than standard closing costs on a refinance. This happens because the title policy is dramatically lower as the title company is getting a full policy on the exchange of the property (sale) and discounts the borrowers loan policy. Escrow for the purchase will generally be higher because it facilitates the sale, not just the loan.
8. Borrowers are never forced to take (pay for) points in any circumstance except if they need to get a lower rate to qualify for the loan. Otherwise points are just used to buy down the interest rate. (See previous column What's the Point).
9. Sub prime borrowers should have only one goal when taking a sub prime loan, to improve their credit by making their payments on time and refinance to a prime loan as quickly as possible. Therefore sub prime borrowers should never take a longer term than necessary to repair their credit.
10. Borrowers should deal in good faith with the lender and expect the same good faith dealing from the lender. If they do not receive the respect and fair dealing from the lender they should not conclude the transaction. The customer is king!
If everyone who enters the mortgage market to finance a house, whether a primary, second home or rental would demand what is due then fewer borrowers, by the thousands, would not be put into precarious financial positions out of lack of knowledge about the industry and fear of asking for the proper information. It is time to upgrade the mortgage industry, replace the misleading information with true and honest facts and upgrade the American homeowner to one who is constantly improving his or her position and not moving backward.