Mortgage loan payments too high? Property value dropped? Feeling frustrated, overwhelmed, ready to just walk away?

STOP! Before abandoning your family’s favorite best-loved house, explore all your options.

Options? Yes, you do have choices. Many homeowners who are in default on their loans don’t know they have options available. Over a dozen solutions are featured in our new eBook, “Stop Foreclosure Fast: Solutions to Save your House”. One secret solution we reveal is a technique called a “Short Sale”, a method of selling your house before it goes to foreclosure.

“But I owe more money on the house than it’s worth. I can’t sell it,” you say. Well, that is a myth. The truth is that you CAN sell your house even if you’re “Upside Down” (meaning you owe money on it than it’s worth).

What happens to the money that’s missing? In other words, if you bought your house for a $400,000 loan, but you can only sell it for $300,000, how will you close escrow if you can’t cough up the extra $100,000 (the “short”)?

Because your lender agrees to take a loss. That’s what a short sale is all about. Due to our current real estate market decline, real estate agents, mortgage lenders, and bankers are now learning how to do Short Sales and help borrowers avoid foreclosure.

Lenders actually prefer short sales. Even though they take a loss from short sales, their losses are LESS than if they went through the foreclosure process. For example, a lender may lose $30,000 with a short sale, but if the same house went through foreclosure, the bank may lose $80,000. So short selling is really to their benefit, because it helps them reduce (minimize or mitigate) their losses.

But why is a short sale better than a foreclosure for you, the borrower? Here’s seven reasons why a short sale is an advantage over a foreclosure.

1. Integrity. You are the homeowners, you borrowed the money, you agreed to the repayment. So you want to do your best to keep up your part of the contract. Even if you can’t make the full payment and pay off your morgage lender in full, there is a lot of satisfaction in knowing you did your best to help the lender avoid a big loss.

2. Pride & Dignity. If you hire a Realtor®, they’ll sell your house just like all the other houses in your neighborhood. Your real estate agent will put up a sign, put ads online, and hold open houses. You can tell the neighbors that you’re selling your house. You don’t have to tell them that your loan is in default. You don’t need to try to hide the foreclosure. No sheriff will come to evict you, there’s no public record of foreclosure. You’ll still hold your head high with pride and dignity.

3. Lower Debt Discharge Income. If you think that abandoning your house and walking away will solve all your problems, THINK AGAIN! If you’re upside down and the lender has to take a loss, they will send you a 1099-C tax form at the end of the year. Their loss (deficiency) gets reported to the IRS as your income. And you’ll probably have to pay tax on this income. So it’s to YOUR benefit to help the lender incur as SMALL a loss as possible. Because that means LESS TAXES you’ll have to pay to the IRS. Are you exempt from this IRS law? Maybe or maybe not. Although a new exemption law went into effect, check with your accountant to see if you qualify of if you’ll have to pay more taxes.

4. Better Credit Report. Let’s face it, a short sale will hurt your credit. It’ll subtract about 200 points from your credit score, can stay on report for 7 years. That’s pretty substantial. BUT a foreclosure is even worse — it subtracts about 400 points from your credit score, and can stay on your report for 10 years. It’s very difficult to get credit after a foreclosure. And it’s difficult to get removed from your credit report, because it’s a public record.

5. Lender may Reward You. Some lenders actually give cash back to the homeowners after a successful short sale — up to $1,500. They show their appreciation for your cooperation and helping them minimize their losses.

6. Keep the Scammers Away. Instead of getting mixed up in a quitclaim deed scheme, do it the legit way, let your Realtor® screen and qualify the buyers.

7. You’re in Good Hands. When you sell, you won’t be at the mercy of the lender’s foreclosure date. You’ll know when you’re moving, there’s no need to wonder and worry. You and your family can feel secure in the hands of a Realtor®. Your professional real estate agent can deal with the lender for you. A Realtor® experienced in short sales will know what documents your lender requires to get it approved. They will help you get the correct paperwork together and submit it to the lender. Less hassle and lower stress for you, and positive energy available to focus on your next home!

Be an empowered homeowner. Don’t give up the fight yet, we’ll help arm you with tools to avoid foreclosure. Many resources are available on our web site, www.Stop-Foreclosure-Fast.info. You owe it to yourself, your lender, and your family to check it out!

“The market is not doing well here and we agreed to pay up to $8,000 of the buyer’s closing costs. Is there anything I can do to keep the amount as far below $8,000 as possible?”

At this point, no. If you agreed to pay “up to” $8,000 of the buyer’s costs, you will almost surely end up paying $8,000 or very close to it. The reason is that any part of the $8,000 that is not needed to pay lender fees or third-party fees can be used to pay points that reduce the borrower’s interest rate. If the excess isn’t used to buy down the rate, it probably will end up in the pocket of the loan officer or mortgage broker. Where it will not end up is back with you.

It is common practice for home sellers to pay all or part of a buyer’s mortgage settlement costs. Paying $308,000 for a house with the seller committed to paying $8,000 in settlement costs is better for a cash-short buyer than paying $300,000 without the commitment because it permits a larger loan and therefore requires less cash.

For example, assume the borrower is putting 10 percent down and settlement costs are $8,000. If the price is $300,000, the buyer needs cash equal to 10 percent of $300,000, which is $30,000, plus $8,000 in costs, which adds up to $38,000. When the price is $308,000, the buyer needs only 10 percent of $308,000, or $30,800.

For this to work, the appraiser must report that the house is worth $308,000, and the seller’s contribution must fall within the lender’s guidelines. Lenders restrict contributions based on how much the buyer is putting down. The common limit with 10 percent down is 3 percent of the price, so in my example the contribution would be an acceptable 2.6 percent.

I sometimes run into larger contributions that don’t fall within lender guidelines, where the payment by the seller is made outside of closing so it can be concealed from the lender. Don’t let anyone talk you into doing that; it is a fraud.

A seller should view a sale price of $308,000 combined with a commitment to pay up to $8,000 in costs as the equivalent of a price of $300,000. In states with transaction taxes, such as Pennsylvania, the tax would be a little larger on the higher price, but that is too small to worry about.

There is only one reason for a seller to select the higher price combined with a commitment to pay settlement costs, and that is to make the transaction feasible for a willing but cash-constrained borrower. If the buyer in my example can come up with $30,800 but not $38,000, the seller can make the deal work by raising the price and paying the costs.

The cash-constrained buyer who agrees to pay $308,000 to receive an $8,000 contribution should aim to use the $8,000 to pay lender fees and third-party charges, and use whatever is left to buy down the interest rate by paying points. For example, if fixed-dollar lender fees are $800 and third-party charges $2,200, the $5,000 remaining should buy down the rate on a 30-year fixed-rate mortgage of $277,200 (90 percent of $308,000) by about 0.75 percent.

But an avaricious loan provider can easily thwart this strategy unless the buyer knows how to protect himself. If the buyer is dealing with a mortgage broker, the $5,000 may end up in the broker’s pocket as extra compensation. The buyer can protect himself against this by negotiating the broker’s fee from all sources in advance, and putting it in writing. Upfront Mortgage Brokers (UMBs) do this as a matter of course. The broker will have no incentive not to pass through the lowest possible rate, and will also prevent any escalation of lender fees.

If the buyer is dealing with an avaricious loan officer (LO) employed by a lender, the $5,000 likely will be used to pay points, but the interest rate may not be any lower than it would have been without the payment. The LO might tell the buyer that the $5,000 bought down the rate from 6.25 percent to 5.5 percent, but 5.5 percent might be the correct rate without the payment!

If the LO is the sole custodian of price data, the buyer is at a severe disadvantage. Generic market price data, such as that published by Freddie Mac or Bankrate.com, is some help but not much. The buyer needs to know the price on his deal, and he needs to be able to monitor it until his own price is locked. The only way to do this is to access online sites that provide transaction-specific prices.

Big-ticket items have been relegated to the back burner for now. The reduce-your-debt environment continues — just ask the major home-improvement contractors who have taken on more and more jobs.

Consumers clearly are pulling in the financial reins. One of the reasons Congress has passed a stimulus package is to get Americans to loosen their grip, spend more cash and begin to turn the economy around.

I’ve always been a pay-it-off kind of guy when it comes to home loans. I believe there are huge benefits — financial and philosophical — to owning the roof over your head. When that roof now covers your office, as it does for millions of small-business owners across the country, isn’t there an extra incentive to make a bigger dent in the domestic debt load as we get older?

Now, with the residential real estate market in slow motion, consumers are looking at all sorts of ways to reduce their debt, save interest dollars and pave a faster path to real equity.

But should the same philosophy hold true for the family cabin? Should you pay it off or diversify?

According to Jack Guttentag, professor of finance emeritus at the Wharton School of the University of Pennsylvania, consumers should view the yield of principal prepayments on their mortgage as equal to the interest rate on their loan — as long as there is no prepayment penalty included in the loan. Hence, if you are paying 6 percent on your loan, prepaying your mortgage would make more sense than plunking any extra cash into a savings account paying 2-3 percent interest.

Guttentag also states that if the yield on mortgage repayment is being compared to the yield on other taxable investments, it doesn’t matter whether yield is measured before tax or after tax (tax-exempt bonds could be an exception.)

Many financial planners will tell you that folks simply don’t focus on stashing away retirement dollars until the loan on the family home is paid in full. The second home, by definition, is “extra.” If the primary residence is owned free and clear, paying off the second home would be a forced savings account, and be judged in a similar way to Guttentag’s guidelines of weighing the yield of a potential investment against the interest rate of your loan.

I have also subscribed to the belief that average consumers should never invest money they can’t afford to lose. For example, I cringe when I hear of folks taking the monthly grocery money and plunking it down on a stock tip they overheard at the high-school basketball game. But stashing extra cash into the mortgage of a second home is a secure investment, especially if the cabin will show long-term appreciation.

The factors that always need to be weighed are risk, comfort and discipline to carry out the work. Would I have the discipline to actually invest additional cash instead of paying off the mortgage? How would I feel if a sure-bet stock went bust, blowing not only my hard-earned extra dollars but also the chance of reducing the number of years on my cabin loan?

Are you one to dig in, do the research and then work the numbers with a broker, or handle the transactions yourself? The real challenge for the average consumer is having the discipline to carry out the challenge. Keep in mind that the biggest mistake common investors make is overestimating net returns over the long term.

Remember, you can save a great deal of money in the form of mortgage interest by prepaying your loan. In fact, if you make an extra payment on your principal every month, you can reduce the loan term of a 30-year loan by approximately 12 years. Conversely, by prepaying the loan, you also lose a piece of your mortgage-interest deduction. Your actual savings is computed with your marginal tax rate and you mortgage interest rate.

There are several home-loan-acceleration computer programs that show you the cost-effectiveness of various options in the mortgage market. Guttentag’s site, www.mtgprofessor.com, offers several excellent calculators, as does www.smartmoney.com.

Sometimes, we need a painful experience to prod us into doing what we should have done in the first place.

On Oct. 1, 2007, a serious fire ravished a condominium building in the Adams Morgan section of Washington, D.C. Fortunately, it does not appear that there were any serious injuries, but many condominium owners and renters will now have to relocate until the building — and the damaged units — are restored.

There was property loss, both in the common areas of the building and within those units where the fire occurred. And clearly there will be a lot of smoke and water damage to the personal property of many of the residents.

Let’s talk insurance: In every condominium and cooperative apartment building, there is what is known as the “master insurance policy.” The legal documents governing these associations require that a certain level of insurance coverage be obtained. When you went to buy your unit, your lender insisted on receiving proof that there was a master policy and that the coverage was consistent with the association’s legal requirements.

But contrary to what many owners believe, the master policy may not cover you for all of your personal loss. According to the Insurance Information Institute, the master policy “covers the common areas that owners share with others in the building like the roof, basement, elevator, boiler and walkways for both liability and physical damage.” If, for example, someone trips on the stairs, the master policy will provide coverage, and should that person file suit, the master will also cover the legal costs incurred by the association.

If a unit is destroyed, the master policy will pay for the restoration of the walls and the ceilings. In some cases (depending on the insurance policy) if your appliances are damaged, the policy will reimburse you for the cost of replacement. Keep in mind that every insurance policy contains a deductible, and you should inquire of your association manager what that number is.

But any improvements that you — and even previous owners — made to the unit will not be covered. The insurance term is “betterments”; if you added wallpaper or remodeled your kitchen or bathroom, these upgrades will not be covered by the master.

Many owners do not understand this, and find out only when it is too late. An unfortunate — but typical — situation is where an owner inadvertently lets his or her bathtub overflow, causing water to cascade down into all of the units below. The master policy will cover the cost to repair the ceilings and the floors, but your valuable Oriental rug and expensive plasma television set that were damaged will not be covered.

You need to obtain your own individual insurance policy. In the trade, it is referred to as an “HO-6″ policy. This will give you coverage — subject to your own deductible — for the betterments in your unit, and for your personal furniture and clothing.

Depending on your own financial situation, the HO-6 policy can also include such things as reimbursing you for monthly assessments and alternative lodging while you are unable to reside in your unit; water and sewer back-ups (which are all too common especially in older buildings); and even expensive jewelry, stamp or coin collections, or fur coats.

Some associations require that every owner obtain the HO-6 policy, and I have always strongly recommended that every association make this a requirement.

You should be able to obtain this kind of policy through any insurance agent. But in my opinion, the best approach is to obtain that policy from the same carrier that issued the master policy.

Take this very common situation: a common-element pipe burst, causing major flooding damage throughout the building, including in your unit. The condominium association files its claim against the master policy, and you file your claim with your insurance company. However, each company points it finger at the other one, stating that it is the obligation of the other carrier to cover the claim. Often, when faced with this situation, I merely tell both agents: “Guys, both the master and the HO-6 policy were issued by the same company, so why not just work it out on your own, and make sure that both the association and the owner are properly compensated for their losses?”

If you own a condominium unit, you must learn the difference between a unit and the common elements. Your unit consists of the area between the four walls, from the floor to the ceiling. Common elements include, for example, the elevators (unless they go to specific units in which case they are called limited common elements); the roof; and the mechanical equipment that services all of the units in the building.

But it’s not that simple. For example, pipes that serve only your unit will most likely be considered part of your unit — even though those pipes go down the walls outside of your unit.

It is important that you understand these concepts. Your association declaration will provide you with this information, but if you get confused with the legal (and architectural) terms, consult the association’s property manager, its attorney or even the insurance agent for your building. It is absolutely critical for every owner to carefully read — and reread periodically — these legal documents.

If you are renting your unit, you probably will not need protection for your tenant’s personal property. However, you still need coverage in case someone gets hurt in your unit, and accordingly should still obtain the HO-6 policy. And you should make it a requirement in your lease that your tenants purchase “renters insurance” — called an HO-4 policy — so that they too will have protection in case problems arise.

Damage to condominium units can come from many sources. The hot water hoses in your washer can burn out. Your fireplace chimney can get stuffed up, unable to provide the necessary updraft. Or the rubber seal under your toilet gets worn down.

One never knows when these problems occur. More importantly, disasters are often out of your control; they are caused by your upstairs neighbor. I am currently involved in a situation where the upstairs owner accidentally drilled a hole in a sewer-line pipe, causing extensive damage to the unit below.

The cost of this insurance is nominal, considering the risk and the exposure involved. The October fire should be a strong incentive to pick up this protection today.

If you are considering a 1031 exchange (also known as a “Starker exchange”), you better make sure that you do it right. The Internal Revenue Service plans to increase its audits and its enforcement of these exchanges by the summer of 2008.

Usually, when a taxpayer sells a business or investment property, the taxpayer must pay a tax on any profit that is made. If the property was owned for more than one year, it will normally be considered a long-term capital gain and the tax will be based on your income. Currently, the highest tax rate is 15 percent.

However, if the taxpayer engages in an exchange, and strictly follows the complex rules, this gain can be postponed. For example, if you purchased your investment property for $100,000 and sold it for $200,000, you would in most cases have to pay the IRS $15,000 in addition to any state or local tax. However, if this property was sold in connection with a Starker exchange and you obtained another investment property worth $300,000, you would not have to pay any capital gains tax. Instead, the basis of the old property would be transferred to the new one; you would have to pay the tax only when you ultimately sold the replacement property and did not engage in yet another 1031 exchange.

But you must understand that a 1031 is not a “tax-free” process; it only defers the time when you have to pay the capital gains tax.

In a report issued last month, the Treasury Inspector General for Tax Administration (TIGTA) advised the IRS that “there appears to be little IRS oversight of the capital gains (or losses) deferred through like-kind exchanges.”

When a taxpayer engages in a 1031 exchange, he or she must file Form 8824 with the IRS for the year in which the exchange took place. The Inspector General reported that more than 338,500 forms were filed in 2004 (the year of the TIGTA’s study). This amounted to deferred gains or losses of more than $73.6 billion. According to the report, “while this represents a doubling of the number of like-kind exchanges reported in 1998, the total dollars amounts deferred more than tripled.”

Like-kind 1031 exchanges serve a valuable function. According to the TIGTA report:

Taxpayers who take advantage of like-kind exchanges increase their purchasing power, as well as their financing and leverage capabilities, because payment of federal tax on the gains is deferred … with additional equity to reinvest, taxpayers can execute exchange after exchange to create a pyramiding effect. The tax liability may be forgiven upon the death of the investor because the heirs may qualify for a stepped-up basis on the inherited property.

But because of the lack of enforcement by the IRS, taxpayers have been taking advantage of these favorable tax rules. For example, the Government Accountability Office (GAO) conducted a similar survey and found that taxpayers often made misrepresentations of the assets that were being exchanged. In order to have a successful 1031 exchange, real property must be exchanged for like-kind property. While this is a very broad category — you can exchange a single-family investment property for raw land, an office building for a shopping center, or a condominium unit for a cooperative apartment — the exchange will not be accepted if you want to exchange your principal residence for some other kind of property. Nor can you exchange a business for real property: it is not “like-kind.”

However, the Inspector General discovered that the IRS generally will not impose any penalties if a taxpayer does not file Form 8824.

The report also highlighted other abuses, such as related party exchanges, incorrect basis figures, and partial, step and bartering exchanges. These are highly complex technical issues that will not be discussed or explained in this column.

Based on its findings, the Inspector General made three specific recommendations, all of which have been accepted by the IRS.

1. The IRS should study tax-reporting and compliance issues involved with like-kind exchanges The IRS agreed to conduct research studies and complete its work by Aug. 15, 2008. Based on the outcome of this research, it appears likely that exchanges that take place this year will be given greater scrutiny.

2. The IRS should provide better information and guidance to taxpayers on how to conduct a proper 1031 exchange. The IRS has agreed that by Jan. 15, 2008, it will provide more information on a number of its publications and forms so as to assist taxpayers in understanding how the exchange process works. Specifically, Publication 17 (entitled Your Federal Income Tax) will be updated to specifically remind taxpayers that they must file Form 8824 with their income tax return if they have been involved in a 1031 exchange during the previous year.

3. The IRS must provide clear guidance to taxpayers regarding the rules and regulations governing like-kind exchanges with respect to second and vacation homes that were not used exclusively by owners.

This is an area that is extremely complex. According to the Inspector General, “the absence of clarification on this issue leaves unrebutted the sales pitch of like-kind exchange promoters who may encourage taxpayers to improperly claim deferral of capital gains tax by selling nonqualified second and vacation homes through ‘tax-free’ exchanges.”

Here, too, the IRS agreed. By March 15, 2008, the IRS will provide additional information to consumers and to tax practitioners about the filing requirements for Form 8824. More importantly, the IRS will increase its “consumer warnings” so as to caution taxpayers to be “wary of individuals promoting improper use of like-kind exchanges.”

The IRS will not discourage the use of the Starker exchange. This process is specifically authorized in Section 1031 of the Internal Revenue Code. But investors must be on their guard against deceptive and fraudulent promotional schemes. Keep in mind that a Starker exchange is not a “tax-free” exchange; it is a “tax-deferral.” If done properly, it will allow the taxpayer to use the moneys that otherwise would go to Uncle Sam for additional investments.

If you plan to get involved in a 1031 exchange, you should make sure your own lawyer and accountant review the process at every step.

In fact, depending on the amount of your gain, it may be best to just pay the capital gains tax and not become a landlord on the new replacement property. Your financial advisors will be able to assess and assist you in making this important decision.

(Note: The entire report can be located on the Web at www.tigta.gov; click on 2007 audit reports. It is report 2007-301-72).

By asking the right questions, you can have a better understanding of the process and be certain that you are getting the product that best fits your needs and circumstances. Here are 20 questions that will help you get key answers about your loan, so you can make an informed decision:

1) Do you represent a mortgage broker, mortgage banker or lender, consumer finance company or a financial institution?

It is important to know whom you are working with and their qualifications. A loan officer for a mortgage broker company assists you in finding a lender. A mortgage banker is a lender who directly makes real estate loans to consumers. A consumer finance company is a non-depository institution that may make high-risk loans with higher rates of interest than a traditional financial institution. A financial institution is a bank, credit union, savings and loan or savings bank that besides making mortgage loans also provides traditional banking services such as checking and savings accounts.

2) If working with a mortgage broker, ask: Are you licensed by the state?

For example, the Department of Real Estate, Office of Real Estate Appraisers, and Department of Financial Institutions regulate most of the real estate services in California. Mortgage brokers doing business in California generally are required to be licensed by the Department of Corporations or the Department of Real Estate. If you are using the services of a mortgage broker, regardless of what state you are in, contact the Department of Corporations (DOC) at www.corp.ca.gov or 1-866-275-2677 and/or the Department of Real Estate (DRE) at www.dre.ca.gov or (916) 227- 0770 to make sure the mortgage broker is properly licensed. Some companies may be licensed by both the DOC and DRE. Ask which license is being used to conduct your loan transaction. Also, many states require advertising to contain a disclosure of the license under which your loan will be made or arranged. You may also wish to check with the Better Business Bureau at www.bbb.org to see if the company is a member and if any complaints have been filed against the company.

3) What is the interest rate you are offering to me and is it a fixed or variable rate? Is this the best possible rate based on my credit score?

The interest rate determines the amount lenders charge you to use their money and is usually quoted as a percentage. The rate can be a fixed rate meaning that it remains the same throughout the loan. There are also variable or adjustable rate loans where the interest rate can change during the term. The rate can go up or down and your payment will adjust accordingly. A lower interest rate results in lower monthly payments or the ability to buy a higher priced home. Some loans offer an extremely low interest rate or payments. Payments on some of these loans may be too low to pay the monthly interest and will increase your loan balance, known as negative amortization or deferred interest, rather than decrease it. Payments on these loans can also increase substantially after several years. Ask your broker or lender if your loan contains these features, and, if so, ask for all of the details so you can decide if this type of loan is right for you.

Your credit score is your history of repaying debt and is the main source lenders use to determine the interest rates they offer you. To obtain the best possible interest rate, you should shop around. A high credit score should result in your being offered a low interest rate. The Department recommends that you obtain a copy of your credit report before applying for a loan. This will allow you to fix any errors and assist you in making sure you receive the best possible loan based on your credit history. Under federal law, you can obtain one free copy of your credit report from each of the three reporting agencies once in a 12-month period. For more information or to get your report, visit www.annualcreditreport.com or call them at 1-877-322-8228.

4) Are you locking my interest rate and, if so, for how long?

A rate lock is when the lender or broker “locks in” a stated interest rate for a specific period of time, usually 30 days. This means that if interest rates raise you still will receive the quoted or “locked” rate. If interest rates drop, you will likely still receive the locked rate (unless you negotiate different arrangements with your lender or broker). You should ask for written verification of the rate lock. You might be required to pay a fee to lock in the rate. If dealing with a broker licensed by the Department of Real Estate, the broker cannot collect any fees, other than for appraisals and credit reports, in advance without prior approval. You should contact the DRE at (916) 227-0770 to find out if a broker has an approved “advance fee agreement”. Mortgage bankers licensed by the DOC may charge you a rate-lock fee prior to loan closing only if there is a written agreement signed by both you and a representative of the lender.

5) What would be my Annual Percentage Rate (APR)?

The APR is the cost of credit and includes the interest rate and all other finance charges. If the APR is .75 to 1 percentage points higher than the interest rate you were quoted, there are significant fees being added to the loan.

6) As a mortgage broker or banker, how much money would you be paid?

A mortgage broker brings borrowers and lenders together and receives compensation for providing this service. The fees can be negotiated. Their fees are disclosed in the various line items on your HUD statement, including broker origination fee, processing fee, and application fee. Lenders also may pay the broker a yield spread premium (YSP), which is a payment to the broker from the lender for selling the borrower a loan at a higher interest rate than the borrower would otherwise be charged. This is generally acceptable if there are no other fees being charged by the broker. A mortgage banker and other lenders also will be paid for the service of providing you the loan. Their fees may include items such as a processing fee, application fee, and document preparation fee. Some of these fees are negotiable. When dealing with a broker licensed by the Department of Real Estate, you are entitled to receive a “Mortgage Loan Disclosure Statement” or other qualifying disclosure, within 3 days of applying for your loan. The disclosure must include how much the broker is being paid for its services, whether directly by you, by the lender, or both. Any changes in the amount of compensation the broker will receive is subject to prior disclosure to you. All lenders are required by federal law to provide a Good Faith Estimate of the costs of your loan and a Truth-In-Lending Disclosure within 3 days of receiving your loan application. If the costs increase significantly subsequent Truth-In-Lending Disclosures are required. You may also request that your closing agent provide an estimated closing statement 24 hours prior to closing your loan.

7) What other costs besides your fees will be associated with this loan?

Other costs may include points, prepaid items and title charges. Points are interest paid upfront and one point is equal to 1% of the loan amount. Generally, if you are paying points you are reducing your interest rate. You also likely will be paying for the appraisal and the credit report. Prepaid items include interest due until your first payment and initial escrow balances for taxes and insurance. Title charges are from the title agency and can include a title search, title insurance, and attorney fees. You can try to negotiate these fees with the title company. When dealing with a broker licensed by the Department of Real Estate, its disclosure to you must include all of the expected costs and expenses of your loan. Any significant changes to those costs must be disclosed to you. Federal law requires that the lender send you the Good Faith Estimate sent to you within 3 days of receiving your loan application.
What is the principal balance of my loan?

The principal balance of your loan is the amount of credit and/or money you are borrowing. When purchasing a home, the principal balance typically is the price of the home plus any fees minus your down payment. If you are refinancing, the principal balance would be the payoff of your current mortgage plus any fees. It also may include any other debt rolled into the loan or cash you receive at closing.

9) How much will the monthly payments be? Does this amount include escrow for property taxes and homeowner’s insurance or will I be responsible for paying these expenses on my own?

It is important to know exactly what your monthly payment will be to help you determine if you can afford the loan. This includes knowing what it will cost you monthly to pay the principal and interest in addition to homeowner’s insurance and property taxes. Beware: Some unscrupulous brokers or lenders try to sell borrowers on a low payment by excluding the additional monthly amounts for property taxes and insurance from the monthly payment quote.

10) When would my payments be due? What is the grace period?

Knowing when your payments are due can help you plan your monthly budget. This is especially important if you are on a fixed income or get paid once a month. Lenders may be willing to work with you during the loan process to set a mutually agreeable due date. It is much harder to get the date changed once you have received the loan.

11) What is the length of the loan? Is there a balloon payment at the end of the loan?

You should know how long you will be paying on the loan. Traditionally, most loans are paid off in 30 years. However, 15- and 20-year loans are available and can drastically reduce the amount of interest you will pay over the life of the loan. In some cases, the loan is a balloon note where the loan is not completely paid off during the term of the loan because the monthly payment only covers the interest due. In these cases, you are obligated to pay off the remaining balance or balloon payment, which can be a considerable amount, at the end of the loan term. If you do not have the funds or the ability to refinance the balloon payment, you could lose your property in a foreclosure.

12) Who would be my lender?

If you are working with a mortgage broker, it is the broker’s job to find you a lender. The mortgage broker will not be loaning you the money.

13) What are the chances that my loan would get sold?

Federal law requires that at the closing table you receive and sign a document stating the likelihood that your loan will be sold. Some loans are never sold, some are sold immediately and others are sold many times. It is also possible that only the servicing rights are sold. This means that while you make your payment to a new company, your old company is still the note holder or lender. Federal and state laws require both the old and new servicing company to notify you in writing of the change.

14) If I pay off the loan early, would I be charged a prepayment penalty? If yes, what is the amount of the prepayment penalty? How many years into the loan would the prepayment penalty expire?

A prepayment penalty is a fee you may be required to pay if you pay off your loan early. While California law permits a prepayment penalty under certain circumstances, the terms of the penalty vary depending on a number of factors such as the type of license held by the mortgage broker who negotiated your loan and the type of residential real property. The disclosures you receive from your mortgage broker or lender should state if there may be a prepayment penalty in your loan. If you have questions concerning your prepayment penalty, you should consult your attorney. If your loan has prepayment penalty provisions they will be included in your loan documents. Typically prepayment penalties do not extend beyond 5 years.

15) What is the appraised value of the property?

The appraisal is an impartial opinion of property value, performed by an appraiser who compares like properties within a close distance to the subject property. It is completed for the lender’s benefit, even if you pay for it, to ensure that the lender is not lending more than the property is worth. It also does not take the place of a home inspection. An appraiser who signs an appraisal in a federally related transaction (e.g., certain real estate-related financial transactions involving a federal financial institution) must be licensed by the California Office of Real Estate Appraisers. To see if your appraiser is licensed, check with the Office of Real Estate Appraisers at www.orea.ca.gov or contact them at (916) 552-9000. If the real estate transaction does not involve a federally related transaction, the appraiser is not required to be licensed in California and therefore is not licensed and regulated by any California state agency.

16) If I pay for the appraisal, how do I obtain a copy of it?

Sometimes a mortgage broker or lender will require you to pay for the appraisal. If you have paid for it, you are entitled to a copy and your lender or mortgage broker can tell you what you need to do. You may be required to request the copy in writing.

17) If I pay for the credit report, how do I obtain a copy of it?

A lender or mortgage broker may ask you to pay for the credit report upfront. You should consult the federal Fair Credit Reporting Act to determine your right to obtain a copy of the credit report. (See Question 3 above for the information on how to obtain a free copy of your credit report.) You are entitled to a disclosure advising you of your right to receive information about your credit score.

18) Am I required to have Private Mortgage Insurance (PMI)? If so, when will it be removed and what do I need to do to have it removed?

PMI is insurance that protects the lender against a loss if the borrower defaults on the loan. It is usually required for loans where the down payment is less than 20% or when the amount financed is greater than 80% of the appraised value of the home. For current loans other than FHA or VA loans, PMI may be automatically eliminated when equity becomes 22% of your original appraised value. You are also entitled to a disclosure from your broker or lender telling you if you have a right to cancel the PMI and the conditions for cancellation. For more specific information, you should contact your lender.

19) Who are you planning on using as the title agency? Are you or your company affiliated with the title company? Should I purchase owner’s title insurance? Many borrowers will let the lender or mortgage broker choose the title company. You should know, however, that you have the right to use the title company of your choice even if it is a different company than selected by the mortgage broker or lender. In some cases when you are buying a property, the sales contract may stipulate a title company. Also, using the same title company as you have previously used may allow you to save some money. You just need to ask. It is not illegal for a mortgage broker or lender to have a financial interest in a title company. They just need to disclose this to you during the loan process. It is best to ask upfront so you can make an informed decision about which title company to use. The title insurance purchased in a loan transaction is typically for the lender’s protection should the title exam miss an outstanding lien. You may want to consider purchasing borrower’s title insurance to protect yourself should a lien be discovered after the close of the loan.

20) Who do I contact to obtain the closing documents for the loan 24 hours in advance of the closing?

You are entitled to obtain a copy of the estimated HUD settlement statement 24 hours in advance of the closing as long as you request it in writing before the 24-hour period begins. Your lender or mortgage broker can tell you who you need to contact to make this request. Having the statement ahead of time will give you and your attorney time to thoroughly review the costs of obtaining the loan and make sure that it is paying off all debt you want to be consolidated into the new loan. It also allows time for you to initiate any changes that need to be made prior to the loan closing.

An Overview of the Loan Process:

Selecting a Mortgage Broker or Lender – As stated earlier, brokers usually act as your agent with the lender. You can also deal directly with some lenders, without using a mortgage broker. Whichever you choose, ensure that you have checked out the company. Try to use companies that people you know have used and can tell you the level of service provided. Rates should be competitive with other companies. Remember that if the deal sounds too good to be true, it probably is.

The Loan Application – You will have to provide a completed loan application. Some brokers will come out to your home to take the application, you can fill one out yourself, or some brokers have Web sites that allow you to submit the application on-line. You will probably be asked to pay for a credit report and appraisal fee up front. If a broker tells you the credit report and appraisal costs are not being charged to you, make sure to get it in writing. Also verify that you will not pay for these items at the close of escrow out of your loan proceeds or that the broker will not demand payment for the fees, if you do not close the loan. The broker will also require that you submit the required documentation that the lender requires in relation to the loan program you are trying to obtain. Both the broker and lender will provide you with required disclosures regarding the terms and costs of the loan. It is important that you review these disclosures and ensure that the terms and costs meet with your approval. Ask questions about anything you do not understand.

Processing the Loan – This is the process where the broker obtains the required information and submits it to the lender’s underwriter for loan approval. This is a critical stage in obtaining your loan. Ensure that you respond to all requests for information in a timely manner. This will increase your chances of getting the loan or learning why you don’t qualify. This is also the time you may want to lock in an interest rate. Remember to keep in contact with the broker and to monitor the loan process, ensuring that the broker is meeting the agreed upon time frames.

Closing the Loan – This is the final stage of the loan process. The closing can take place at a title company, escrow company, or the broker’s office. The broker may use a signing service that will bring the documents to you for signing. No matter where the signing takes place, take your time at the closing table and carefully review and understand all the documents you will be signing. If you do not understand something, ask questions before you sign. You may want to consider hiring an attorney to review all the loan documents before they are signed. It is a small price to pay in comparison to the headaches that can follow if you fall victim to an unscrupulous lender.