Read Before You Sign by William Bronchick
WilliamBronchick: Too many
investors go to closing and sign documents without ever reading them, taking
the word of the “professionals” involved in the closing. This is a huge
mistake unless that professional is your lawyer, and he or she has read
and understood the loan documents. Don’t presume that the lawyer you are paying
represents you. Many banks have lawyers that represent them and charge that fee
to the borrower.
Mortgage brokers and lenders are not by their
nature dishonest but there are enough shady characters that try to slip things
by on borrowers. In some cases, it is a mistake by the lender or a
miscommunication between the mortgage broker and the lender, both of which
result in the borrower getting a different loan than what was promised.
The most common things that are incorrect on a loan are:
Prepayment Penalty
The most
common “hidden” clause is a prepayment penalty that the lender does not
disclose or that was supposed to be omitted. The only way to know for sure is
to read your mortgage note to see if there is a prepayment penalty clause. In
some cases, a lender may say there is no prepayment penalty but has inserted a
“soft” prepayment penalty (applies to refis only). In addition, read carefully
how much the penalty is, and how long after the loan is originated the penalty
applies.
Fixed versus Adjustable Rate
If you pay
for a fixed-rate loan, you may end up with a surprise at closing in the form of
an adjustable-rate loan that is fixed only for a certain time period, such as
two years. In some cases, you may be promised a five-year fixed rate and end up
with a three-year fixed rate. Moreover, read carefully about how the loan
adjusts. Some ARM loans can only be adjusted twice a year, others can be
adjusted monthly. Finally, look at the amount the loan can adjust each time,
and the maximum rate the lender can charge over the life of the loan. All of
this will be spelled out in the mortgage note. (Hint: if the note is titled,
“Adjustable Rate Loan,” it’s a dead giveaway that you don’t have a fixed-rate
loan!)
Owner-Occupied Loan
If you
apply for the loan as an investor, the mortgage broker may submit it for
approval as an owner-occupied loan, either by accident or on purpose. Read the
documents carefully. Do not sign your name to any document saying that you
promise to live in the property if you aren’t actually going to do so. WilliamBronchick says that in most cases, the mortgage or deed of trust will have a
rider (addendum) that says you do not intend to occupy the property as your
principal residence.
The bottom line, my friends, is READ
before you sign. Once you sign, you are out of luck, because there’s no
three-day right of rescission for an investor loan!
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