Prepayment Penalty Must Be Disclosed

Comment: As a Realtor, I was appalled by your "advice" to the homeowner who had to pay a prepayment penalty on his loan because he sold the house within the prepayment penalty.
 

First, you essentially called the writer a liar by saying he admitted he knew there was a prepayment penalty. He did not admit this. He clearly recognized after the fact that the prepayment penalty information was in his loan documents. It sounds to me that he didn't realize he had to pay this penalty until it showed up on his HUD-1 form when he sold his home. I have had this exact thing happen to my sellers.

Second, you infer that it was his fault for not more closely checking his loan documents. Give me a break! His lender should have clearly told him there would be a prepayment penalty if he went with this loan. No buyer should have to figure this out while signing a two-inch thick pile of documents. The lender has an obligation to clearly spell out the terms of the loan so the buyer knows what he will be signing before he signs it. The [closing] should not hold any surprises.

Finally, you should know most lenders who refinance a home that has been listed for sale in the past six months will require a prepayment penalty. So you did nothing to educate your readers about this fact either.

You really make me wonder whose side you are on with your column.

A: Thanks for your note. Let’s review that question again.

Legally, the home buyer was responsible for reading each page of the legal documents he signed. When a prepayment penalty is attached to a loan, there are at least 2 to 4 separate disclosures that have to be signed and initialed. The buyer admitted he knew there was a prepayment penalty. I assumed that he knew this before the closing.

But let's say he didn't. Are you letting a home buyer off the hook when it comes to reading and signing legal documents? I'm fairly certain that the lender (unless it was a predatory lender) told this buyer there was a prepayment penalty. But even if the lender didn't, there were still several pages of disclosures that said "prepayment penalty" on them that had to be signed before the loan could close.

My feeling is that no one should sign any legal documents unless they read them first. Signing or initialing a legal document indicates to the world that you have read and understand the paper you’ve signed.

Buyers can take as much time as they want at the closing and have the lender answer all of their questions right then and there. If there's something different about the documents than what was originally agreed to when they applied for the loan, the buyer should speak up.

At my own recent closing on an investment property, I caught a quarter-point mistake in the interest rate on the loan documents. I found it by asking plenty of questions about the numbers of the paper.

Let’s face it: A two-inch stack of legal documents is a lot to swallow in one sitting. That's why I recommend every home buyer hire an attorney to walk him or her through the documents page-by-page. It's worth every penny to have their expertise.

But the bottom line is that home buyers are making a significant investment in real property and must accept the responsibility that comes with it. If they feel that the lender is "surprising" them with a prepayment penalty at the closing, then they should stop the closing (this is their right) and insist that the prepayment penalty be removed.

While this sounds hard, it really isn't. If a lender has attached a prepayment penalty at the last minute, it can be detached as well.

As for taking sides, I don't. But I do feel that home buyers, sellers, real estate agents and lenders need to take responsibility for their own actions and mistakes.

One last issue, if the lender did not have the borrower sign the proper disclosures and hid the prepayment penalty, then, of course, the buyer has the right to hire an attorney and sue the lender for the lender’s failure to disclose and the switch of terms at the closing.

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