How to Understand Mortgages

houses-890351_640When applying for a mortgage there is sometimes an overwhelming amount of paper work to be completed. The Federal Government however does require a number of disclosures to apply for a new loan, and this must be done within 72 hours of your signing a loan application. There is also a myriad of papers to sign during and after the application and funding process. These disclosures are used as a method of protecting consumers from a process that they may not understand. If you understand the function and primary purpose of these documents it can make your mortgage process a lot less intimidating.

One of the first documents you will see is called The Truth in Lending Disclosure. This explains your annual percentage rate or APR and the total amount financed. The mortgage process will identify your monthly payments, finance charges, and late payment charges. You will also be informed of any prepayment penalties, insurance requirements or any restrictions.

There will be The Good Faith Estimate, which is a breakdown of the total settlement costs and is a critical document. This document will include an estimate of the following fees.

1. Loan origination fees
2. Credit report fees
3. Appraisal fees
4. Loan Points
5. Prorated interest
6. Homeowners and mortgage insurance premiums
7. Title search fees and title insurance premiums
8. Document preparation fees

I your lender should sell your loan to another lender, you may be given a Transfer of Servicing Disclosure Statement. This will only happen when another lender will be collecting your mortgage payments.

Two more disclosures you may see are the Private Mortgage Insurance Disclosure, and the Appraisal Notice. These will explain your private mortgage insurance benefits, and your right to have a copy of the appraisal report. Do not let the lender rush you when you are reviewing these documents. They are meant for your information and if you have any questions about anything they contain, by all means ask about it.

You may also want to research the Mortgage Debt Relief Act 2016. This was signed into law in 2007 and was extended in December of 2015 by President Obama. This act prevents homeowners that went through a short sale from being taxed on the amount of their home mortgage debt that has been forgiven. Usually this debt counts as taxable income. However, if the house has been lived in for at least two of the previous five years, and is your principal residence or used it to build or buy materials to make improvements to the home, then it is not a taxable income

If you don’t qualify for the Mortgage Debt Relief Act, you may qualify for the IRS insolvency clause, and still be able to avoid paying taxes on the forgiven debt.

If you are considering using a short sale you should by all means consider sitting down with a professional to review your options and to discuss potential legal and tax implications.
You should ask your lender the following questions:

  • Will you provide me with a good faith estimate costs
  • Can I lock in on an interest rate
  • What is the minimum down payment required
  • What is required for a prequalification letter
  • Is there a prepayment penalty on the loan

If your lender says there is a prepayment penalty you should consider walking away from that lender. Most consumers will need to refinance their mortgage at least once within a 30 year time period.

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