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Consumer Assistance Topics

Mortgages

Last Updated: May 26, 2021

Shopping for a mortgage is, in some ways, like shopping for a car or other large item-- the price and terms may be negotiable. To get the best deal, you should compare all the costs involved in obtaining a mortgage. Shopping, comparing, and negotiating may save you thousands of dollars.

This guide will help you understand mortgage terms, provides tips for obtaining the best terms, explains consumer protections, and provides other useful information for consumers who are looking for the best home loan deal.

Mortgage Basics

In its simplest terms, a mortgage is a type of loan that allows a purchaser to buy a home.  If you default on a mortgage, the mortgage agreement gives the lender the right to take back the property.

There are many types of home loans and the most common is a fixed-rate loan that is repaid over 30 years. With a fixed-rate loan, a borrower’s monthly principal and interest payments remain the same for the life of the loan. Other features of the fixed-rate mortgage include:

  • Your payments are predictable and not affected by the interest rate changes in the market.
  • Interest rates could go down while you are locked into your mortgage at a higher-than-market rate.

Other loans have adjustable interest rates, which means your principal and interest payments can increase (or decrease) over time. Features of an adjustable-rate mortgage include:

  • You might have a low rate for an initial period of one, three, five, seven, or 10 years.
  • Monthly payments may initially be lower than fixed-rate loans.
  • The interest rate and your payment can increase significantly throughout the term of the loan.
  • If interest rates rise, do not count on being able to refinance into a lower rate fixed-rate loan, as your financial situation could change (e.g., due to a job loss)—and still, refinancing to a rate lower than the going rate may not be possible.

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Consumer Protections on Mortgages

Consumer protections for home loans are in many cases determined by the type of loan. For example, there are disclosure requirements specifically tailored for adjustable-rate loans, so consumers know how their payments may increase. Other protections are particular to property located in flood zones. The next section lists some of these consumer protections, focusing on those that provide the most benefit to the greatest number of consumers.

Certain laws apply to mortgage lending and prohibit discrimination practices by lenders in the mortgage lending arena.

  • The Equal Credit Opportunity Act (ECOA) prohibits lenders from discriminating against credit applicants in any aspect of a credit transaction on the basis of race, color, religion, national origin, sex, marital status, age, whether all or part of the applicant's income comes from a public assistance program, or whether the applicant has in good faith exercised a right under the Consumer Credit Protection Act.
  • The Fair Housing Act prohibits discrimination in residential real estate transactions on the basis of race, color, religion, sex, handicap, familial status, or national origin.

Both laws make it  illegal for a lender to refuse a loan—or charge more for a loan—based on these characteristics. The laws apply throughout the loan process, from the time you inquire about a loan application until you pay off the loan.

In addition, a major regulation issued by the Consumer Financial Protection Bureau (CFPB) requires that lenders provide clear and accurate disclosures to consumers during the mortgage lending process. The “Know Before You Owe” rule combines the disclosures required by the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA) into two forms. The first form, the Loan Estimate, emphasizes the key loan features, risks, and costs of loans and is intended to aid in comparison shopping. The second form, the Closing Disclosure, mirrors the information on the Loan Estimate and provides the final terms and costs of the mortgage transaction. The two forms are designed to be used together to help consumers compare loan terms and prevent surprises at “closing.” (Closing typically refers to the time when the loan applicant signs the agreement to pay the loan, gives the lender a mortgage on the applicant’s home, and becomes the owner of the home.)

Importantly, the “Know Before You Owe” rule requires lenders to give consumers time to review and consider the information that is provided in the Loan Estimate and Closing Disclosure. Other provisions limit when lenders may charge fees or require the submission of documents in support of a loan application to certain phases of the application process. The rule also requires the disclosures to provide fees accurately so that applicants can compare the costs of different loans offered by lenders.

There are also laws and regulations to protect borrowers from risks during the mortgage rigination process. For example, there are special requirements for high-cost and higher-priced mortgages, as well as for reverse mortgages. It is also illegal for loan originators to direct consumers to a particular loan because that loan would make more money for the loan originator (exceptions apply for home equity lines of credit and timeshares). Practices like “kickbacks” on mortgages are prohibited. There are also limitations on the use of escrow accounts.

The Homeowners Protection Act of 1998 makes it easier for homeowners to cancel private mortgage insurance (PMI). PMI is insurance that protects lenders from the risk of default and foreclosure, and it is generally used with loans where the borrower makes a down payment of less than 20 percent.

Under the Homeowners Protection Act, consumers can cancel PMI in a few different ways:

  • Written request. Once the loan balance has been reduced to 80% of the original value of the homeowner can send a written request to their  mortgage servicer to cancel PMIFor example, if the original sales price (or appraisal value at consummation, whichever is lower) and loan amount was $100,000 and regular payments have reduced the outstanding loan balance to $80,000, the homeowner can request to cancel PMI. The lender may consider other factors, such as payment history, when deciding whether or not to cancel PMI. Borrowers should also keep in mind that if the property value has decreased, canceling PMI may not be possible.
  • Automatic termination. For borrowers that are current on their loan, PMI automatically terminates once the principal balance reaches 78 percent of the original value of the home. Using the same example, PMI would terminate for a loan with $100,000 original value once the homeowner reduced the outstanding balance to $78,000.
  • Final termination. If a borrower took out a 30-year fixed rate loan, has made payments for 15 years, and is current on the loan, the loan servicer must terminate PMI. In other words, the servicer terminates PMI coverage right after the borrower has reached the midpoint of the loan’s amortization period.

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Tips for Getting the Best Mortgage

Home loans are available from several types of lenders--thrift institutions, commercial banks, mortgage companies, and credit unions. Different lenders may quote you different prices, so you should contact several lenders to make sure you are getting the best price.

You can also get a home loan through a mortgage broker. Brokers arrange transactions rather than lend money directly; in other words, they find a lender for you. Brokers have access to many lenders, which can mean a wider selection of loan products and terms from which you can choose and will generally contact several lenders regarding your application. However, you should still consider contacting more than one broker, just as you should with banks, credit unions, or thrift institutions.

Whether you are dealing with a lender or a broker may not always be clear. Some financial institutions operate as both lenders and brokers. And most brokers' advertisements do not use the word "broker." Therefore, be sure to ask whether a broker is involved. You should ask each broker you work with how he or she will be compensated so that you can compare the different fees. Be prepared to negotiate with the brokers as well as the lenders.

Be sure to get information about mortgages from several lenders or brokers. Know how much of a down payment you can afford, and find out all the costs involved in the loan—not just the amount of the monthly payment or the interest rate. Ask each lender and broker for information about the same loan amount, loan term, and type of loan so that you can compare the information. The following information is important to get from each lender and broker:

Rates

  • Ask each lender and broker for a list of its current mortgage interest rates and whether the rates being quoted are the lowest for that day or week.
  • Ask whether the rate is fixed or adjustable. Keep in mind that when interest rates for adjustable-rate loans go up, generally so does the monthly payment.
  • If the rate quoted is for an adjustable-rate loan, ask how your rate and loan payment will vary, including whether your loan payment will be reduced when rates go down.
  • Ask about the loan's annual percentage rate (APR). The APR takes into account not only the interest rate but also points, broker fees, and certain other credit charges that you may be required to pay, expressed as a yearly rate.

Points

  • Points are fees paid to the lender or broker for the loan and are often linked to the interest rate; usually the more points you pay, the lower the rate.
  • Check your local newspaper for information about rates and points currently being offered.
  • Ask for points to be quoted to you as a dollar amount--rather than just as the number of points--so that you will actually know how much you will have to pay.

Fees

Typically, a home loan involves many fees, which may include loan origination or underwriting fees; broker fees; and transaction, settlement, and closing costs. Every lender or broker should be able to give you an estimate of its fees. Many of these fees are negotiable. (See “Consider Your Offers” below for more information.) Some fees are paid when you apply for a loan (such as application and appraisal fees), and others are paid at closing. In some cases, you can borrow the money needed to pay these fees, but doing so will increase your loan amount and total costs. "No cost" loans are sometimes available, but they usually involve higher rates.

  • Ask what each fee includes. Several items may be lumped into one fee.
  • Ask for an explanation of any fee you do not understand. Some common fees associated with a home loan closing are listed on the Mortgage Shopping Worksheet in this brochure.

Down Payments

Some lenders require 20 percent of the home's purchase price as a down payment. However, many lenders now offer loans that require less than 20 percent down--sometimes as little as 3 percent--on conventional loans. In addition to conventional loans with low down payment requirements, there are government-assisted programs such as FHA (Federal Housing Administration), VA (Veterans Administration), or USDA Rural Development. Loans through these programs may have down payment requirements that are substantially smaller than 20 percent.

  • Ask about the lender's requirements for a down payment, including what you need to do to verify that funds for your down payment are available.
  • Ask your lender about special programs it may offer.

Private Mortgage Insurance (PMI)

If a borrower does not make a 20 percent down payment, the lender usually requires the home buyer to purchase private mortgage insurance (PMI) to protect the lender in case the home buyer fails to pay.  If PMI is required for your loan:

  • Ask what the total cost of the insurance will be.
  • Ask how much your monthly payment will be when including the PMI premium.
  • Ask how long you will be required to carry PMI.

Consider Your Offers

Once you know what each lender has to offer, negotiate for the best deal that you can. Have the lender or broker write down all the costs associated with the loan. Then ask if the lender or broker will waive or reduce one or more of its fees or agree to a lower rate or fewer points. You'll want to make sure that the lender or broker is not agreeing to lower one fee while raising another or to lower the rate while raising points. There's no harm in asking lenders or brokers if they can give better terms than the original ones they quoted or than those you have found elsewhere.

Once you are satisfied with the terms you have negotiated, you may want to obtain a written lock-in from the lender or broker. The lock-in should include the rate that you have agreed upon, the period the lock-in lasts, and the number of points to be paid. A fee may be charged for locking in the loan rate. This fee may be refundable at closing. Lock-ins can protect you from rate increases while your loan is being processed; if rates fall, however, you could end up with a less favorable rate. Should that happen, try to negotiate a compromise with the lender or broker.

Once you have decided on the type of mortgage you want, there are several steps you can take to get the best price for your mortgage.

  • Check advertisements in local newspapers and on the Internet to get an idea of the best terms and rates. Be aware, however, that rates change frequently, and you may not be able to get the published rate.
  • Contact several lenders on the same day to compare quotes. Do not be afraid to let lenders compete for your business by letting them know you are shopping for the best deal.
  • Negotiate for the best price you can get. Ask the lender for better terms than originally quoted. Lenders might offer different prices to different borrowers even with the same qualifications. Ask the lender to waive or reduce one or more of the fees, including origination fees, or agree to a lower rate. Make sure the lender does not lower one fee and raise another in its place. Sometimes a creditor will offer a lower rate if you pay an upfront fee in exchange for lowering the rate, called a discount point, or just “point.” One point is 1% of the loan amount. If you consider paying an upfront fee in exchange for a lower rate, be sure to know how much of a rate reduction does the discount point buy, and how will it affect the overall cost of the loan.
  • Be sure to get a Loan Estimate of settlement service charges you will likely have to pay. The Loan Estimate is an itemized list of the costs and fees associated with your loan, given to you in good faith by your lender or broker.
  • Use the Loan Estimate to compare and understand all costs, terms, and the risk of “payment shock.” The only charge a creditor can require you to pay before giving you a Loan Estimate is a reasonable fee for a credit report, so you can get Loan Estimates on different kinds of loans, and from different creditors to help you compare. For example, you can get a Loan Estimate for a 4.5% fixed rate loan, and one for a 4% adjustable rate loan, to help you understand and compare the overall costs and risks of each.

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Pre-Approval

Lenders use certain criteria to qualify you for a mortgage loan, including your income, debt, and credit history.  You can get a sense for how much a lender is willing to lend you, and hence, how much home you can afford by requesting a pre-approval from a lender.  Pre-approval also serves as a commitment from a lender to lend you money, which may be appealing to home sellers.

To obtain pre-approval, you need to assemble financial records and fill out an application. You will usually need:

  • Pay stubs for the last two or three months,
  • W-2 forms for the last two years,
  • Tax returns for the last two years,
  • Information about your assets and long-term debts,
  • Recent bank statements, and
  • Proof of any additional income. (You do not need to disclose alimony or child support payments unless you want them considered in repaying the loan.)

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Homebuyer Assistance Programs

There are a number of different programs available to help first-time homebuyers.

Many cities and local governments offer homebuyer assistance programs, especially for people with lower incomes. Financial institutions may also offer special loan products to help you become a homeowner.  In addition, some financial institutions offer Individual Development Accounts, in which participating organizations match your savings contributions to help you save for a down payment or closing costs.

These programs typically require that you complete financial education classes.

If you are looking for assistance in purchasing a home:

  • Ask your lender or local government about the homebuyer assistance programs they offer.
  • Ask local real estate agents about special programs.
  • Check with a local Housing and Urban Development (HUD)-approved homeownership counseling agency.

HUD Approved Counseling Agencies (hud.gov)

Federal, state, and local governments offer many types of home loan programs. The Federal Housing Administration (FHA) and Veteran Affairs (VA) are two of the most common. Each home loan program has specific eligibility requirements, and not everyone will be eligible.

Benefits of these programs vary, but may include:

  • Low down payment requirements,
  • More flexible underwriting standards in which the lender will consider non-traditional forms of credit history (e.g., rent or utility payments), and higher ratios of debt compared to your income,
    • Longer payment terms than typical mortgage loans (note: your monthly payment will be lower, but the mortgage will take longer to repay and you will pay more in interest over the life of the loan), and
    • Homeowner education requirements.  These programs help you understand the home buying process, budgeting, finding a home, getting a loan, and maintaining a home. Many HUD-approved homeownership counseling agencies offer these classes.

Some restrictions to these programs may include purchase price limitations, service charges, and higher loan origination fees.

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Credit Problems

Don't assume that minor credit problems or difficulties stemming from unique circumstances, such as illness or temporary loss of income, will prevent you from getting a mortgage loan. If your credit report contains negative information that is accurate, but there are good reasons for trusting you to repay a loan, be sure to explain your situation to the lender or broker. If your credit problems cannot be explained, you will probably have to pay more than borrowers who have good credit histories. But don't assume that the only way to get credit is to pay a high price. Ask how your past credit history affects the price of your loan and what you would need to do to get a better price. Take the time to shop around and negotiate the best deal that you can.

Whether you have credit problems or not, it's a good idea to review your credit report for accuracy and completeness before you apply for a loan. To order a copy of your credit report, contact AnnualCreditReport.com.

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Foreclosure Prevention

Banks that originate and service mortgage loans are encouraged to make prudent attempts to find solutions for homeowners having trouble making their mortgage payments. Exploring options that can keep homeowners in their homes may be one of the best ways for lenders to mitigate losses, preserve customer relationships, and maintain safe and stable neighborhoods.

Homeowners who currently have, or expect to have, difficulty making their payments should contact their loan servicer or reputable counseling agency as soon as possible to discuss options. Troubled borrowers should be careful in dealing with organizations that encourage borrowers to cease making payments or walk away from their home while also promising to repair their credit. If it sounds too good to be true, it may well be a scam that could damage your credit and/or cost more in the long run. Working directly with the servicer or legitimate non-profit organizations is the best approach for troubled borrowers.

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Mortgage Glossary

Adjustable-rate loans, also known as variable-rate loans, usually offer a lower initial interest rate than fixed-rate loans. The interest rate fluctuates over the life of the loan based on market conditions, but the loan agreement generally sets maximum and minimum rates. When interest rates rise, generally so do your loan payments; and when interest rates fall, your monthly payments may be lowered.

Annual percentage rate (APR) is the cost of credit expressed as a yearly rate. The APR includes the interest rate, points, broker fees, and certain other credit charges that the borrower is required to pay.

Conventional loans are mortgage loans other than those insured or guaranteed by a government agency such as the FHA (Federal Housing Administration), the VA (Veterans Administration), or the Rural Development (formerly known as Farmers Home Administration, or FmHA).

Escrow is the holding of money or documents by a neutral third party prior to closing. It can also be an account held by the lender (or servicer) into which a homeowner pays money for taxes and insurance.

Fixed-rate loans generally have repayment terms of 15, 20, or 30 years. Both the interest rate and the monthly payments (for principal and interest) stay the same during the life of the loan.

The interest rate is the cost of borrowing money expressed as a percentage rate. Interest rates can change because of market conditions.

Loan origination fees are fees charged by the lender for processing the loan and are often expressed as a percentage of the loan amount.

Lock-in refers to a written agreement guaranteeing a home buyer a specific interest rate on a home loan provided that the loan is closed within a certain period of time, such as 60 or 90 days. Often the agreement also specifies the number of points to be paid at closing.

A mortgage is a document signed by a borrower when a home loan is made that gives the lender a right to take possession of the property if the borrower fails to pay off the loan.

Points are fees paid to the lender for the loan. One point equals 1 percent of the loan amount. Points are usually paid in cash at closing. In some cases, the money needed to pay points can be borrowed, but doing so will increase the loan amount and the total costs.

Private mortgage insurance (PMI) protects the lender against a loss if a borrower defaults on the loan. It is usually required for loans in which the down payment is less than 20 percent of the sales price or, in a refinancing, when the amount financed is greater than 80 percent of the appraised value.

Thrift institution is a general term for savings banks and savings and loan associations.

Transaction, settlement, or closing costs may include application fees; title examination, abstract of title, title insurance, and property survey fees; fees for preparing deeds, mortgages, and settlement documents; attorneys' fees; recording fees; and notary, appraisal, and credit report fees. Under the Truth in Lending Act (TILA), the Real Estate Settlement Procedures Act (RESPA) and the TILA-RESPA Integrated Disclosure Rule, the borrower receives a Loan Estimate of closing costs within three business days of application.

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