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WHENYOUSHOPFORAMORTGAGE,
“DOYOURHOMEWORK”
May 2007
Item # 126-126
National Association of REALTORS®
500 New Jersey Avenue, NW
Washington, DC 20001
Center for Responsible Lending
910 17th Street NW, Suite 500
Washington, DC 20006
The National Association of REALTORS
®
,
“The Voice for Real Estate,” is America’s largest trade
association, representing more than 1.3 million members
involved in all aspects of the residential and commercial
real estate industries. For more information, visit
www.REALTOR.org.
The Center for Responsible Lending is a nonprofit,
nonpartisan research and policy organization dedicated to
protecting home ownership and family wealth by working
to eliminate abusive financial practices. CRL is affiliated
with Self-Help, one of the nation’s largest community
development financial institutions. For more information,
visit www.ResponsibleLending.org.
NeighborWorks
®
America creates opportunities for
people to improve their lives and strengthen their
communities by providing access to home ownership and
to safe and affordable rental housing. For more information,
visit www.NW.org.
WATCH OUT FOR PREDATORY LENDERS
Here are some warning signs:
•Sounds too easy. “Guaranteed approval” or “no income
verification” regardless of borrower’s current employment,
credit history, and assets. These claims indicate the lender
doesn’t care about whether you can afford to make the
payments over the long haul.
•Excessive fees. Higher lender and/or mortgage broker
fees than are typical in your market. Because these costs can
be financed as part of the loan, they are easy to disguiseor
downplay. On competitive loans, fees may be negotiable.
It is common for home buyers to pay only 1 percent of
the loan amount for prime loans. By contrast, a typical
predatory loan may cost 5 percent or more.
•Large future costs. High-risk adjustable rate mortgages
where the payment rises a lot after the “teaser rate” period
are seldom appropriate for families who already have had
problems repaying other loans. Home buyers should avoid
large single “balloon” payments (a lump sum due at the
end of the loan’s term).
•Closing delays. The lender delays closing, so your
commitment on a reasonably priced loan expires.
•Over-valued property. Inflated appraisals that allow
excessive fees to be included in the loan and result in the
borrower owing more to the bank than the home is worth.
•Barriers to refinancing. Prepayment penalties that make
it hard for a borrower to refinance in order to pay off a
high-cost loan by taking advantage of a low-cost loan.
•No down payment loans. These loans may be split into
two mortgages, with one having a much higher cost. Home
buyers should be sure they can afford the payments.
•Unethical document management. Ethical lenders and
brokers always require you to sign key loan papers, and
never ask you to sign a blank document or a document
dated before the date you sign.
ADDITIONAL RESOURCES
For immediate advice,call 888.995.HOPEto speak to a
counselor on how to avoid foreclosure. Available in English and
Spanish, 24/7. Or visit www.995hope.orgfor more information.
HUD Resources:
•For a list of HUD-approved counseling agencies, by state,
go to www.hud.gov/counseling.
•HUD’s Internet page—“How to Avoid Foreclosure”—is
aimed at borrowers with FHA-insured mortgages, but can
help other borrowers as well. Go to www.hud.gov/foreclosure.
Freddie Mac: “Keeping Your Home, Protecting Your
Investment.”Go to www.freddiemac.comand search for
this brochure by typing in the full name of the brochure.
Ginnie Mae: For a simple calculator to help homebuyers
estimate how much they can afford to spend, read“How
Much Home Can You Afford?”http://www.GinnieMae.gov.
“Looking for the Best Mortgage”is a brochure issued by
11 federal agencies on how to shop, compare, and negotiate
the best deal on a home loan.
www.federalreserve.gov/pubs/mortgage/mortb_1.htm.
Americans for Fairness in Lending: To find consumer
resources related to a variety of lending issues, go to
www.affil.org.
Consumer Handbook on Adjustable Rate Mortgages
(the “CHARM” booklet)issued by the Federal Reserve
Board (FRB) and the Office of Thrift Supervision (OTS).
http://www.FederalReserve.gov. At the FRB site, click
on “publications and education resources” and then on
“consumer information brochures.”
Credit-reporting agencies:
•Equifax 800.685.1111 www.Equifax.com
•Experian 888.397.3742 www.Experian.com
•TransUnion 800.916.8800 www.TransUnion.com
Go to www.AnnualCreditReport.comtoask for a free copy
of your credit report, once a year, or call 877.322.8228.
COUNSELING RESOURCES
Non-profit organizations dedicated to helping consumers
avoid foreclosure can be invaluable.
•NeighborWorks®organizations work with the
Homeownership Preservation Foundation to support a
nationwide assistance number—888.995.HOPE. You can
speak with a counselor, day or night, to help you get back
on track financially. (English and Spanish)
•Reputable counseling agencies, such as NeighborWorks®
organizations, can help you avoid foreclosure. Look up
your nearest NeighborWorks®organization at www.nw.org.
•The U.S. Department of Housing and Urban Development
(HUD) website has a list of HUD-approved counseling
organizations, by state (www.hud.gov/counseling). We
recommend that the list be used as a starting point to
find good counselors. You also can call 800.569.4287
or TDD 800.877.8339.
•Watch out for questionable counseling companies
who advertise that, for a minimal fee, they will assist
homeowners by hiring a lawyer to defend the foreclosure
in court or negotiate lender assistance on the borrowers’
behalf. You should call a HUD-approved counseling
organization, a local NeighborWorks®organization,
or888.995.HOPE before you pay or sign anything.
NeighborWorks®America
1325 G St., NW, Suite 800
Washington, DC 20005
AREYOUHAVINGPROBLEMS
PAYINGYOURMORTGAGE?
LearnHow to Avoid Foreclosure
and Keep Your Home
AREYOUHAVINGPROBLEMS
PAYINGYOURMORTGAGE?
Learn How to Avoid Foreclosure
and Keep Your Home
HOW REALTORS
®
CAN HELP
REALTORS®are in the business of helping people become
homeowners and want to do everything they can to make
sure you can afford to stay in your home.
•The best and least expensive option will often be working
with the current lender (or the “loan servicer” hired by the
lender to oversee your loan). Read more about your
options on the next page.
•If your current lender isn’t willing or able to help, you may
be able to refinance your current mortgage with another
lender. REALTORS®can help you find responsible lenders
that make fair and affordable loans.
•To address the growing foreclosure problem, especially
with subprime loans, some state and local governments
and nonprofit organizations are offering financial assistance.
Ask your REALTOR®or counselor about who to call.
•Counseling agencies are in the business of helping
borrowers like you. Check out Counseling Resources
for some ideas.
•Remember, you should shop just as carefully for a
mortgage as you do for a car or anything else you buy.
Getting the lowest possible rate and fees can save you
many thousands of dollars over the life of the loan.
•Sometimes the only option is selling the home. Of course, no
one is better at helping a seller than a REALTOR®.It is better
to sell than go through foreclosure because it will be easier to
qualify for credit in the future and buy another home.
•Be wary of advertisements like “Cash for Houses/Any
Situation” or “We Buy Houses for Cash.” Consumer
groups have learned that many of these are scams that
bait homeowners with the promise of rescuing them from
imminent foreclosure. Unfortunately, the “rescue” often
involves the borrower signing over the house and the
family being evicted from their home.
TALK TO YOUR LENDER
Talking to the lender, or “loan servicer” that collects the
payments, should be one of your first steps. The earlier you
call, the better your chance to work out a solution. Here are
some options:
•Forbearance. Lenders may let you make a partial
payment, or skip payments, if you have a reasonable plan
to catch up. Tell your lender if you expect a tax refund, a
bonus, or a new job.
•Reinstatement. Reinstatement refers to making a payment
that covers all your late payments, usually at the end of a
forbearance period.
•Repayment Plan. If you can’t afford reinstatement, but
can start making payments to catch up, the lender may let
you pay an additional amount each month until you are
caught up.
•Loan Modification. Your lender may agree to amend your
mortgage to help you avoid foreclosure. The options include:
° Adding all the missed payments to the loan amount
and increasing the monthly payment to cover the
larger loan.
° Giving you more years to pay off the loan, lowering
the interest rate, and/or forgiving part of the loan, to
lower your monthly payment.
° Switching from an adjustable rate mortgage to a fixed
rate mortgage, so you aren’t exposed to increases in
your monthly payment.
° Requiring amounts for taxes and insurance to be
included with your monthly mortgage payment so you
avoid big bills in addition to your mortgage.
•Sign Over the Property to the Lender in Exchange
for Debt Forgiveness. This can hurt your credit, but is
better than having a foreclosure in your credit history.
YOU’RE NOT ALONE IF YOU’RE HAVING
TROUBLE PAYING YOUR MORTGAGE
Thehousing boom led to a record homeownership rate of
nearly 70 percent, but some homeowners now face problems
making their mortgage payments and can’t refinance their
loans. Over the last few years, lenders invented new types of
mortgages to help families buy their first homes and refinance
their existing mortgages. Many of these mortgages helped
families without cash for a down payment, or with less-than-
perfect credit, qualify for loans known as “subprime” loans.
Subprime loans have a higher interest rate and higher costs,
such as prepayment penalties. A very popular, widely available
mortgage product is the hybrid adjustable rate mortgage
(ARM). Hybrid ARMs have an initial period with a lower
interest rate (“teaser rate”) followed by significant increases
over the remainder of the loan. The hefty payment increase is
often called “payment shock” because the borrower is surprised
by the size of the increase and can’t afford the new payment.
If you are having trouble paying your mortgage for any reason,
orexpect problems, you should work with experts and your
lender to find a solution now. If you fall behind and don’t take
action, the lender will foreclose on your home. If that happens,
you may lose your home and all of the money you have already
invested in it. The sooner you act, the better the chances you
will avoid foreclosure.
The Center for Responsible Lending estimates that 2.2 million
American households with subprime mortgages have lost or
will lose their homes as monthly payments rise on high-risk
mortgages. These families stand to lose as much as $164 billion
of equity in their homes.
This brochure will help you understand your options and give
you tips on how to avoid losing your home—regardless of
what kind of mortgage you have.
MORTGAGES WITH “PAYMENT SHOCK”
Mortgages like these can give you a “payment shock”:
•2/28 and 3/27 Mortgages.A2/28 or 3/27 adjustable rate
mortgage gives the borrower a fixed payment for the initial
two- or three-year period before adjusting the mortgage up as
often as every six months. After the initial “teaser rate” period,
your mortgage payments typically adjust up every six months.
•Interest-Only Mortgages.An interest-only mortgage lets
you pay only the interest on the loan for the first 5 or 10
years and nothing to pay off the loan amount (principal).
After the interest-only period, the mortgage requires much
higher payments covering both interest and principal that
must be repaid over the remaining years of the loan.
•Payment Option Adjustable Rate Mortgages.Payment
option mortgages let the borrower decide how much to pay
each month. You can even pay less than the interest, and add
the unpaid interest to the total amount of principal you owe.
Or you can pay just the interest or an amount sufficient to
pay off the loan in 15 or 30 years. These mortgages can have
an especially big payment shock.
Be careful if your mortgage has any of the following features:
•A“teaser rate” or “no interest” period that expires and leads
to a big jump in your monthly payment.
•An option to pay less than the full interest due in any given
month. Taking that option makes the amount you owe go up
instead of down, since the interest you don’t pay is added to
your loan balance.
•An adjustable interest rate with very high or no limits on the
amount your payment can go up.
•Apayment that doesn’t include an amount for paying
property taxes and homeowners insurance. This means
you may be hit with big bills you didn’t expect.
If you’re in trouble, call
WHAT IF THE VALUE OF THE PROPERTY
ISLESS THAN THE AMOUNT YOU OWE?
Where the value of the property is less than the mortgage
amount, REALTORS®can help explain to the lender why it
makes sense to let the homeowner sell the property for the
best price and then forgive the remainder of the debt.
•Unfortunately, the amount of debt the lender cancels is
treated as income when you file your tax return.
•REALTORS®and the Center for Responsible Lending are
working for enactment of pending legislation so homeowners
aren’t stuck with a tax bill they can’t afford to pay.
•Some lenders may require you to sign a promissory note
for the difference between the value of the home and the
amount owed. Before you sign any documents, please seek
the advice of a housing counselor or lawyer.
FIND OUT MORE: QUICK REFERENCES
FOR CONSUMERS
Tohelp educate home buyers and homeowners about today’s
mortgage options, the National Association of REALTORS®
(NAR)and the Center for Responsible Lendinghave produced
aseries of consumer information brochures. This is the fourth
in the series, which also includes:
•How to Avoid Predatory Lending
•Specialty (Nontraditional) Mortgages: What Are the Risks
and Advantages?
•Traditional Mortgages: Understanding Your Options
NAR also has issued a brochure in partnership with HUD’s
Federal Housing Administration:
•FHA Improvements BenefitYou
You can find all the brochures on NAR’s Website
(go to www.REALTOR.org/subprime).