by Attorney William Bronchick
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. 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 on the property if you aren’t actually going to do so. 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! Remember, having an attorney or mentor that understands real estate is always a bonus!