A high-cost home loan is a mortgage with above-average fees or interest. If you don't qualify for a conventional mortgage because of credit or income problems, you may instead receive a high-cost home loan offer from a lender. Federal law sets the definition of a high-cost home loan and places special requirements and restrictions on lenders to protect borrowers from predatory lending practices.
High-cost home loans are those that either exceed the government's point and fees threshold or the Average Prime Offer Rate (APOR) interest threshold; this makes them more expensive due to higher borrowing costs.
Features of High-Cost Loans
A high-cost home loan exceeds one of two thresholds set by the federal government: the interest rate threshold or the point and fees threshold. The interest threshold for a first mortgage is a rate of 6.5 percentage points above the APOR. The APOR is a benchmark rate set by the U.S. government that reflects the rate for comparable transactions on that date.
For loans over $20,000, the point and fees threshold is 5 percent of the loan amount. The threshold for loans under $20,000 is the lesser of 8 percent of the loan amount or $1,000.
There is one additional test for a high-cost mortgage related to any prepayment penalty. If the penalty is applied more than 36 months after the loan is opened or if the penalty amount is more than 2 percent of the prepayment amount, then the mortgage is high-cost.
Loan Disclosure Requirements
Lenders must give written disclosures to borrowers receiving a high-cost loan. You must receive a notice stating you have the right to cancel the loan, even if you've already signed the papers, within three business days of signing.
The lender must disclose the annual percentage rate and other terms related to the loan. For example, if your loan has a variable interest rate, the lender must tell you how high your monthly payments could go. You'll also receive a notice explaining that the lender can take your home if you fail to make payments.
Banned Loan Features
High-cost loans can't have certain features under federal law, such as some types of balloon payments in the terms of the mortgage. A high-cost loan can't charge fees for loan modifications loan or for a loan payoff statement. There are restrictions on fees and practices, such as a limit on late fees to 4 percent of the past due payment. Also, the lender is prohibited from encouraging borrowers to default on existing loans in connection with a opening a new high-cost mortgage the replaces the existing loan.
Other Loan Considerations
Lenders can't give you a high-cost loan based on the property's value; the lender must consider your ability to repay the debt. You can't refinance a high-cost home loan into another home loan within the first 12 months unless it benefits you financially.
A lender must document high-cost loans correctly, as either open-end or closed-end. If you have a closed-end loan, the money is usually sent out only one time, at the loan's closing. An open-end loan, such as a home equity line of credit, has repeated transactions, as you draw off the line over a period of time stated in your loan agreement.
Lawsuits for Violations
You may sue a lender who violates laws regarding high-cost home loans. A borrower who sues a lender for violating high-cost home loan laws may receive damages, legal fees and cancellation of the loan for a maximum of three years.