When applying for a mortgage, laws require a lender to disclose several facts about the loan at the time of application or within three days of submitting it. It is important to familiarize yourself with these points so you can be fully educated about possible charges, rates, and ownership of the loan.
Good Faith Estimate
The Real Estate Settlement Procedures Act (RESPA) requires the lender to give the estimated closing (settlement) costs of a loan. These can include a processing fee, appraisal or inspection fee, credit report fee, and mortgage insurance application fee. The Department of Housing and Urban Development (HUD) has an itemized list of these costs, and the lender is required to provide the borrower with a brochure from HUD about the home-buying process. The closing costs are separate from the loan amount and are usually expected to be paid upfront.
Truth in Lending
The federal Truth-in-Lending Law ensures that borrowers will have knowledge of the terms and conditions of a loan so they can effectively compare loan programs and lenders. A lender must disclose the annual percentage rate (APR) of the loan, which is the cost of credit to the borrower expressed in a yearly rate. This charge can include indirect charges a borrower must pay including appraisals and credit reports if those costs are to be paid with loan payments.
Transfer for Servicing
The lender must also provide the intent regarding servicing the loan. This is also called selling the loan, and it refers to the rights of payment collection. It is common for a loan to be sold at least once during its life. Servicing a loan does not personally affect the borrower other than changing where payments may be sent. The lender should tell what percentage of loans it has transferred in the past. It must also give adjustable rate mortgage (ARM) applicants a maximum cap for monthly payments.
Besides the required disclosures a lender must make, be sure to ask about prepayment penalties. Loans with a prepayment penalty sometimes have a lower interest rate, and lenders may default to this. If you are interested in making early or double payments on your mortgage, be sure to ask the lender about possible penalties.