Home loan process leaves some borrowers baffled

Negative amortization. Prepayment penalties. LIBOR and 12-Month Treasury Average indexes. Balance caps. Discount points. Origination fees. Confused yet?

Finding the right loan officer is the key to a great deal

So are homeowners across the Valley who are finding themselves trapped in troublesome, often unnecessary loans that have plunged some into precarious financial situations.

The problem stems in part, mortgage experts say, from borrowers misunderstanding legal and industry jargon in complex mortgage documents.

Most people scan over loan applications pretty fast, said Taum Hemmingsen, owner-broker of Scottsdale-based Marketline Mortgage.

“They don’t read page by page,” Hemmingsen said. “They don’t see where they might have questions.”

By the time borrowers reach the closing table, they feel stuck and unable to walk away even if there’s a discrepancy, he said.

“Mixed up”

In a recent study by the Federal Trade Commission, 819 mortgage customers across the country were asked to identify key loan costs and terms in disclosure forms given them to read.

About one-third couldn’t identify the interest rate. Half couldn’t accurately pick out the loan amount. And two-thirds didn’t recognize there was a penalty for refinancing with another lender within two years.

The study also included in-depth interviews with 36 borrowers, many of whom had loans considerably more costly than they had realized.

“Even people who said they took a lot of effort to talk to lenders and read their forms, even they were getting mixed up,” economist and study co-author James Lacko said.

The mortgage process’s inherent complexity has made borrowers easy targets for predatory lenders and contributed to the market’s current foreclosure troubles, said loan officer Jeff Underwood with AmeriFirst Financial in Mesa.

Underwood received at least three phone calls last week from distressed borrowers, searching for a way out.

One man learned his $440,000 loan had a roughly $22,000 prepayment penalty — a fee charged for paying all or a portion of a loan off early.

Another caller was talked into refinancing over the phone and charged $17,000 in closing costs, he said.

Experts say, though, borrowers can avoid sticky situations by choosing a trustworthy loan officer and knowing what to look for on loan forms.

Truth in Lending

One frequently overlooked loan feature is the prepayment penalty.

These penalties are common on subprime mortgages, given to riskier borrowers with less than perfect credit, but those with good credit have been hit too.

“Unfortunately, I think it’s too easy for a loan officer to hide it or not discuss it up front,” said Hemmingsen with Marketline Mortgage.

A borrower can find whether they may have a prepayment penalty by looking at the federally-mandated Truth-in-Lending disclosure, which has two boxes — one for “may” and another for “will not” have to pay a penalty.

There is typically another individual document concerning the penalty that borrowers receive at closing.

The Truth-in-Lending statement, which a borrower receives during the application process, also includes key elements, such as the total amount of interest a consumer will pay and the amount financed.

Another important aspect of the disclosure is the payment schedule, which lets a borrower verify if they have a fixed- or adjustable-rate loan.

Consumers with a 30-year fixed-rate loan should see 359 payments at the same dollar amount and one payment with the remaining balance, said Chris Mozilo, president of the Arizona Mortgage Lenders Association.

If you see a certain payment for the first 12 months and then it changes to another amount for a different period, it’s an adjustable-rate, Mozilo said. An adjustable-rate is more complex than a fixed, he added.

“If you don’t fully understand the loan product that’s being presented, don’t accept it,” he said.

line-by-line

Last year, Gilbert resident James Bowman thought he was getting a 30-year fixed-rate loan, but he was in for a shock.

After the papers had been signed, he realized the loan was for 30 years but only the first two years were fixed and the interest rate was 10.2 percent instead of 7.5 percent.

“We knew that there were shady loans going on out there, and we were trying to be careful,” Bowman said.

The loan officer also slipped in a prepayment penalty, something Bowman specifically said he didn’t want.

Now, he’s trying to find out if his home has dropped in value to see if refinancing is an option. If so, he’ll have to tack a $22,000 prepayment penalty on to the new loan.

Borrowers need to get a second and third pair of eyes, such as an attorney or knowledgeable friend, to look over loan documents, Bowman said.

“If I could go back, I would have made sure that I took the paperwork and sat down and had someone go through it with me line-by-line,” he said.

“They didn’t know”

Another problematic loan is the option ARM that has several payment choices, one of which allows borrowers to pay less than the interest due. The result: They add to the principal balance each month instead of whittling it down, known as negative amortization.

Underwood recently received a call from a woman who was given a negative amortization loan and added between $9,000 and $11,000 on her loan.

“They had no idea,” Underwood said. “They didn’t know that’s the way it worked.”

The loan’s minimum payment option also has a low introductory rate that eventually jumps drastically higher. People think the 1 percent teaser rate is the best thing ever, Hemmingsen said.

“The client hears what they really want to hear,” he said.

look closely

Other important documents that should be closely looked over include the loan note, which has the interest rate, monthly payment, the date an adjustable product will change and other details.

The good faith estimate form, received during the application process, breaks down loan costs, such as origination fees, title charges, property tax and homeowners insurance.

The final settlement statement, given at closing, also contains a breakdown of costs.

The two documents should match up, though won’t always be exactly the same, especially if the borrower has changed loan terms during the process, Mozilo with the Lenders Association said.

“If it’s way off, then you’ve got some questions to ask,” he said.