What might be hiding in the fine print of your mortgage documents? In this reader’s case, a prepayment penalty that they may not be able to get out of.
Q: I recently took out a mortgage to purchase my first home. It’s a condo. I went with a non-traditional lender that offered a loan about 1 percent higher than the market rate, as this was the only lender who would fund a loan on a condominium with open litigation.
The association was suing the builder for for construction defects. Within days of closing, the lender immediately sold my loan to a different loan servicer. About a month after the sale to the new servicer, I received notification from Fannie Mae that they had acquired my loan.
By February, 2018 the litigation was settled, and I qualified for a standard loan with a traditional lender (“Bank”). A couple weeks after successfully refinancing, I received notification from Lender A that Service had “hit” them with an EPO (early pay off) penalty, and that I was incurring a prepayment penalty of approximately $10,000.
Given that Fannie Mae was the owner of my loan at the time I refinanced, is this prepayment penalty enforceable? When I combed through my mortgage packet there is specific language in the Note and Deed of Trust saying I shall not be charged a prepayment penalty. However, sure enough there was a supplemental “rider” included in my packet that stated I “may be charged a prepayment” penalty.
Does one document take legal precedent over the other? Am I still liable for the penalty?
A: A couple of years ago, the federal government enacted new rules governing disclosures when it comes to home loans. One of the important changes was the requirement that a lender deliver to you a closing disclosure. If you can go back to your file, you should see if you received this closing disclosure. We’d be very surprised if you didn’t.
One of the main points of this Closing Disclosure document was to prominently display the basic terms of your loan. In large print and boxes, the disclosure will tell you the following: the loan amount, the interest rate, your monthly principal and interest owed, whether the loan has a prepayment penalty and whether the loan has a balloon payment.
It’s not unusual for a lender to create a loan package and use the standard forms for residential notes and mortgages and then attach a rider with the prepayment penalty language. Having said that, it would be quite strange to us if the lender did not use the Closing Disclosure form. If the Closing Disclosure form indicated that you had a prepayment penalty and that prepayment penalty was reflected in the note, it would appear that you agreed to it.
Back in the boom days of the real estate market, pre-Great Recession, we’d see quite a number of loans with no money down, loans with prepayment penalties, and loans with negative amortization. We are aware that some condominium developments do not fit into the nice categories that Fannie Mae and Freddie Mac have for them, and that might lead you to use a different lender who offers unique or less than desirable loan terms.
When we’ve come across these types of deals, we usually see a higher interest rate. But, we haven’t seen prepayment penalty loans in quite some time – and are pretty surprised that your relatively recently closed loan had one.
You need to check all of your documentation. We have to assume that if the lender did not disclose the prepayment penalty to you as may have been required, the prepayment penalty may not be valid or, if it is valid, could give you a right to fight the lender on this charge. After you look at your documents, you’ll have a better idea of where you stand.
Once you have more information, you can address the issue with the lender or hire an attorney to go over the documents in detail and determine how to proceed.
To our other readers: You must read all of your documentation carefully so that you know exactly what kind of mortgage terms you have agreed to and don’t get surprised by an unwelcome, and very expensive, fee.