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 Understanding Section 32 Mortgages
  What lenders can't do with bad credit refinance loans
By the EchoBay Loans Expert
 Understanding Section 32 Mortgages
Dear EchoBay Expert: After applying for a bad credit refinancing loan with a lender, my neighbor, who is a real estate agent, told me my loan should be classified as a "Section 32 Mortgage" under the Truth in Lending Act. Does this mean I'll get a lower rate?

Dear Loyal Reader: No, it does not mean that you will get a lower rate. A Section 32 Mortgage is a high rate, high fee loan that activates the Truth in Lending Act. The rules apply only to refinancing or home equity loans. With a first lien loan, such as in your situation, if the APR exceeds the rate on Treasury securities by more than eight points, the loan is classified as a Section 32 Mortgage.

If it is for a second lien, the APR must exceed the rate on Treasury securities by more than 10 points. It also applies if fees exceed 8% of the loan amount. If this is the case, the lender is required to give the borrower certain disclosures. The first states that the borrower has the right not to take out the loan even after the application is completed.

You have three days to decide whether to sign after your receive the disclosures for your loan. The second required disclosure informs the borrower that if you do not make the required payments, you can lose your home as well as any money you have put into it.

The final disclosure requires the lender to disclose the APR, the payment amount and the loan amount. If it is a variable rate loan, it must also state that the payment may change and give a maximum payment amount.

Unfortunately, Section 32 mortgages do not guarantee a lower rate but it does require the lender to be upfront about all fees and your interest rate.

 What lenders can't do with bad credit refinance loans
Dear EchoBay Expert: A few years after purchasing my home I've fallen into the poor credit category due to a layoff from my job and I will be applying for a bad credit refinance loan to see if I can reduce my monthly mortgage payments. By law, what kind of unfair things can a lender not do when approving me for a high-rate loan?

Dear Loyal Reader: The Home Ownership and Equity Protection Act of 1994, which is part of the Truth in Lending Act, is meant to protect you from predatory lenders and deceptive lending practices. First and foremost, your lender cannot only look at the value of your home when deciding whether or not to approve you for a loan; the lender must take your ability to pay the loan back into consideration prior to approving your bad credit refinance loan.

This will ensure that you're not getting yourself into a further trap that would result in the loss of your home. You're also protected from being "surprised" by an interest rate. Your lender is required to provide you with the details of your loan's APR at least three business days prior to the closing of your loan. The Act also prevents your lender from providing you with a monthly payment that is so low that it would negatively amortize your loan.

In addition, the Act prohibits your lender from demanding you to pay the loan in full, with limited exceptions. If you suspect that your lender is violating any of the fair lending laws, you might want to contact the Federal Trade Commission to report the violations.

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