Q: I recently took out a mortgage to purchase my first home. It’s a condo. I went with a nontraditional 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 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 of weeks after successfully refinancing, I received notification from Lender A that Service had “hit” them with an EPO (early pay off) penalty, and I was incurring a prepayment penalty of approximately $10,000.
Given 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 delivers to you a closing disclosure. If you can go back to your file, you should see if you received this closing disclosure. We would be very surprised if you did not.
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 is 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 you had a prepayment penalty and that prepayment penalty was reflected in the note, it would appear you agreed to it.
Back in the boom days of the real estate market, pre-Great Recession, we would see quite a number of loans with no money down, loans with prepayment penalties and loans with negative amortization. We are aware some condominium developments do not fit into the nice categories 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 have come across these types of deals, we usually see a higher interest rate. But, we have not seen prepayment penalty loans in quite some time; and we are pretty surprised 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 will 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 you know exactly what kind of mortgage terms you have agreed to and do not get surprised by an unwelcome, and very expensive, fee.
Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through her website, ThinkGlink.com.