What happens if I fail to make my mortgage payments ?
Q: How much money will I have to have to buy a home?
A: Most consumers aren't able to finance the entire purchase price of a home, but there are expenses you will need to cover out of pocket when purchasing a home. These expenses typically are:
- Earnest money - or the deposit you make on the home when you submit your offer to the seller. The majority of sellers want to know that a buyer is serious about wanting to purchase the house, especially if it means refusing any subsequent offers. If the seller accepts your offer, the earnest money is applied either to your down payment or closing costs. If the offer isn't accepted, or you meet the terms of the contract under which the deposit is required to be returned to you, the money will be refunded. If you change your mind about purchasing the home after reaching an agreement, the seller may be able to keep the earnest money.
- Down payment - is a percentage of the price of the home that you fund directly. The balance of the purchase price of the home is then financed.
- Closing costs - the fees associated with the completion of the paperwork when purchasing a house, covered on the settlement statement. These can include, for example, appraisal fees, title search and recording fees.
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Q: Where can I get a home loan?
A: The options available for securing a home loan are wide and varied, including:
- Local, regional or national banks
- Credit unions
- Government programs
- Mortgage companies
- Loans from family members or friends
- Personal savings
- A loan directly from the home seller
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Q: How does the lender decide the maximum loan amount that I can afford?
A: The lender considers your debt-to-income ratio, which is a comparison of your gross (pre-tax) income to housing and non-housing expenses. Non-housing expenses include such long-term debts as car or student loan payments, alimony and child support. According to the Fair Housing Administration ("FHA"), monthly mortgage payments should be no more than 29% of gross income. The mortgage payment combined with non-housing expenses should total no more than 41% of income. The lender also considers the amount of cash available for down payment and closing costs, credit history and so forth when determining your maximum loan amount.
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Q: I want to purchase a home but am not able to because of discrimination. What can I do?
A: The Equal Credit Opportunity Act ("ECOA") and the Fair Housing Act ("FHA") protect you against discrimination when you apply for a mortgage to purchase, refinance or make home improvements.
The ECOA prohibits discrimination in any aspect of a credit transaction based on:
- Race or color
- Religion
- National origin
- Sex
- Marital status
- Age (provided the applicant has the capacity to contract)
- Receipt of income derived from any public assistance program
- The applicant's exercise, in good faith, of any right under the Consumer Credit Protection Act, the umbrella statute that includes ECOA
The FHA prohibits discrimination in all aspects of residential real estate-related transactions, including:
- Making loans to buy, build, repair, or improve a dwelling
- Selling, brokering, or appraising residential real estate
- Selling or renting a dwelling
It also prohibits discrimination based on:
- Race or color
- National origin
- Religion
- Sex
- Familial status (defined as children under the age of 18 living with a parent or legal guardian, pregnant women, and people securing custody of children under 18)
- Handicap
If you've been trying to buy a home, condo, or co-op and you believe your rights have been violated, you can file a fair housing complaint with the Office of Fair Housing and Equal Opportunity. If a lender rejects your loan application, you must be informed of the reason why within 30 days from the day you applied.
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Q: What is the difference between a fixed rate and variable rate mortgage?
A: In a fixed rate mortgage, your interest rate stays the same for the term of the mortgage, which typically is either 15 or 30 years. With a fixed-rate mortgage, you'll always know what your payment will be. An adjustable rate mortgage, or "ARM," typically has a lower interest rate and monthly payment initially, allowing for easier loan qualification and approval. But watch out: the rate and payment is subject to changing, up or down, depending on the terms of the mortgage. The adjustments, which have limits and can potentially change as frequently as every six months, are based on a financial index, such as the U.S. Treasury Securities index.
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Q: I was pre-qualified for a home loan, but now the lender is backing out. Is this legal?
A: Pre-qualification can be considered an "inquiry" and is an informal way to see how much you may be able to borrow. You can be 'pre-qualified' over the phone with no paperwork by telling a lender your income, your long-term debts, and how large a down payment you can afford. Without any obligation, this helps you arrive at a ballpark figure of the amount you may have available to spend on a house.
Pre-approval is a lender's actual commitment to lend to you based on an application. It involves assembling the financial records and going through a preliminary approval process. Pre-approval gives you a definite idea of what you can afford and shows sellers that you're serious about buying.
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Q: What does the Truth in Lending Act have to do with home loans?
A: The main purpose of the Truth in Lending Act is to assure the meaningful disclosure of consumer credit and lease terms, including those in advertisements, so that consumers can easily compare terms and shop wisely for credit. It requires creditors to provide the consumer information on the cost of the credit, or finance charge, as a dollar amount and as an annual percentage rate (the "APR"). The APR includes not only the interest rate, but also all the fees and closing costs that a consumer would pay for the loan. The act is also known as Title I of the Consumer Credit Protection Act.
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Q: How does the Real Estate Settlement Procedures Act ("RESPA") affect a home purchase?
A: The Real Estate Settlement Procedures Act requires lenders to disclose information to potential customers throughout the mortgage process. By doing so, it protects borrowers from abuses by lending institutions. Lenders must fully inform borrowers about all closing costs, lender servicing and escrow account practices, and business relationships between closing service providers and other parties to the transaction.
When borrowers apply for a mortgage loan, mortgage brokers and/or lenders must give the borrowers a:
- Special Information Booklet, which contains consumer information regarding various real estate settlement services (required for purchase transactions only)
- Good Faith Estimate ("GFE") of settlement costs, which lists the charges the buyer is likely to pay at settlement. This is only an estimate and the actual charges may differ. If a lender requires the borrower to use a particular settlement provider, then the lender must disclose this requirement on the GFE.
- Mortgage Servicing Disclosure Statement, which discloses to the borrower whether the lender intends to service the loan or transfer it to another lender. It also provides information about complaint resolution.
If the borrowers don't get these documents at the time of application, the lender must mail them within three business days of receiving the loan application.
If the lender turns down the loan within three days, however, then RESPA does not require the lender to provide these documents.
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Q: Should I expect the Good Faith Estimate to list the exact charges that I will pay at settlement?
A: No. The Good Faith Estimate is only an estimate or range of charges. For example, the lender may not know the costs for a settlement agent that you choose, or the exact amount that will be collected for an escrow account for taxes and insurance.
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Q: What does a HUD-1 Settlement Statement cover?
A: The HUD-1 Settlement Statement shows the actual settlement costs of the loan transaction. The form clearly shows all charges imposed on borrowers and sellers in connection with the settlement. RESPA allows the borrower to request to see the HUD-1 Settlement Statement one day before the actual settlement. The settlement agent must then provide the borrowers with a completed HUD-1 Settlement Statement based on information known to the agent at that time.
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Q: Are property taxes and homeowners insurance part of my mortgage payment?
A: Depending on the terms of your mortgage, these charges may or may not be included in your payments. Frequently, the terms "PITI" ("principle, interest, taxes, insurance") or "PI" ("principle, interest") are used with mortgage loans and indicate whether property taxes and homeowners insurance are included in the referenced figure.
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Q: Do I have to escrow taxes and insurance?
A: Section 10 of RESPA sets limits on the amounts that a lender may require a borrower to put into an escrow account for purposes of paying taxes, hazard insurance and other charges related to the property. RESPA doesn't require lenders to impose an escrow account on borrowers, but certain government loan programs or lenders may require escrow accounts as a condition of the loan.
During the course of the loan, RESPA prohibits a lender from charging excessive amounts for the escrow account. Each month, the lender may require a borrower to pay into the escrow account no more than 1/12 of the total of all disbursements payable during the year, plus an amount necessary to pay for any shortage in the account. In addition, the lender may require a cushion, not to exceed an amount equal to 1/6 of the total disbursements for the year.
The lender must perform an escrow account analysis once during the year and notify borrowers of any shortage. Any excess of $50 or more must be returned to the borrower.
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Q: Do lenders have to pay interest on my escrow account?
A: Possibly. RESPA does not require interest to be paid, but some states do have this requirement.
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Q: I got a notice from the county that my lender did not pay my taxes on time and the county is assessing a penalty. Do I have to pay this bill?
A: Lenders are required by Section 6 of RESPA to make escrow account disbursements on time. Send the bill to the lender. The lender should pay the penalty for failing to pay the taxes on time, as long you were current in your mortgage payments. If the lender refuses, you may wish to follow the guidelines for filing a complaint or suit.
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Q: My loan was transferred to a new lender. I made my loan payment on time, but to the old lender. Can I be charged a late fee?
A: No. For 60 days, neither lender may charge a late fee as long as you make your payment on time to the previous lender or to the new lender. Your lender must send you a notification 15 days before your payment is due to the new lender. Both lenders must provide you with certain information about the loan transfer, including:
- When the payment is due to the new lender
- The new lender's address
- The new lender's toll-free telephone numbers
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Q: Can I be forced to purchase mortgage insurance?
A: Yes. Most lenders require borrowers who have less than a 20% down payment on the purchase price of a home to carry private mortgage insurance ("PMI") as a condition to provide the loan. The insurance is used to cover the lender's loss should you default on the mortgage loan.
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Q: What happens if I fail to make my mortgage payments?
A: A mortgage is a lien secured by the property. If you fail to keep the terms of the mortgage either by making late payments, partial payments or no payments at all, the lender may foreclose. Foreclosure means that the lender can repossess and sell your home to repay the loan. If your property sells for less than amount owed on the mortgage, your lender could seek a deficiency judgment. If the lender is successful in obtaining a deficiency judgment, you not only lose your home, you also continue to owe a debt to your lender.
If you run into difficulties making your payments, contact your lender immediately and explain your situation.
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Information courtesy of the Department of Housing and Urban Development.
