Understanding Insurance, Spotting Predators

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By Jack Guttentag
Saturday, June 7, 2008

Here are some of the questions I get most often from mortgage borrowers:

Q: Does mortgage insurance protect me if I'm disabled or lose my job?

ANo, mortgage insurance protects the lender against loss in the event that you default. You pay the premium, but the lender receives the protection. The sole benefit to you is that, with mortgage insurance, lenders are willing to make loans with down payments smaller than 20 percent of purchase price or appraised value. A few mortgage insurers have experimented with programs that provide the kind of protection to borrowers that you are asking about, but they have never caught on.

What is the best type of loan if I know I will be paying it off within two years?

When your time horizon is very short, you want to minimize your upfront cost. The best way to do this is with a no-cost three-year or five-year adjustable-rate mortgage. A no-cost loan is one with an interest rate high enough to command a rebate from the lender (negative points) that will cover your settlement costs. Avoid interest-only or option ARMs because these minimize your payments rather than your upfront cost.

How can I know whether a mortgage broker or loan officer is a predator?

You can't. There is no directory of predatory loan providers. Checking the Better Business Bureau or the state licensing agency is usually a waste of time, because very few misdeeds are reported and predators change their names and locations.

This question is posed only by borrowers who have allowed themselves to be solicited, which is a big mistake. Select your loan provider; don't be selected. If you were a wild-mushroom fancier who lived in a woods full of mushrooms and one knocked on your door and said "eat me," you wouldn't because it might be poisonous. What the mushroom fancier does is choose from among those he knows are safe, ignoring the rest. You should select a loan provider that way.

If I refinance two years after purchase, why do I need a new title insurance policy?

You don't, but the lender will probably require a policy that protects him against the risk that liens might have been placed on your property during the two years since the policy was written. Title insurance policies are backward-looking -- they cover incidents prior to the date of the policy. Anything that happens after that date is not covered. If only a few years have elapsed since the previous policy, however, you are entitled to a discount, because the insurer doesn't have a lot of work to bring the policy up to date. Be sure to ask for the discount. If you don't, you may not get it.

Am I in trouble because I borrowed as an occupant, then changed my mind and rented the property?

Lying on your application is a fraud, but everyone is entitled to change their mind. If you occupy the house for a while and then rent it, you are probably in the clear. If you never occupy it, appearances are against you. If you make all your payments on time, however, nobody will care and the chances are that nothing will happen. If you never occupy the property and become a chronic delinquent, a flag goes up by your name, an investigation could reveal your transgression, and action might be taken against you.

What is the major risk in buying a home under a lease-purchase contract?

The option to purchase a house under a lease-purchase contract is contingent on the buyer paying the agreed-upon rent every month. If the buyer doesn't pay, the seller doesn't have to sell. But the devil is in the details. A contract that allows the seller to back out if the buyer is late only once, by a single day, is clearly unfair. The buyer should read the contract carefully to make sure that this provision is not unreasonably onerous.

What should I do if the lender mistakenly raises my tax escrow payment?

Pay it, and then make your own calculation of what the escrow should be and submit a "qualified written request" under the Real Estate Settlement Procedures Act to get your money back. On my Web site ( http://www.mtgprofessor.com), you can find an article on how to calculate your escrow, and another one on how to file such a request. The worst thing you can do is refuse to pay, because the lender will place your insufficient payment in a suspense account, which means you are delinquent and on your way to having your credit ruined.

Jack Guttentag is professor of finance emeritus at the Wharton School of the University of Pennsylvania. He can be contacted through his Web site, http://www.mtgprofessor.com.

© 2008 Jack Guttentag

Distributed by Inman News Features


© 2008 The Washington Post Company

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