Getting a Loan: Your Home As
If you need a personal
loan and are thinking about using your home as security, you should know
about a credit law that gives you extra time to reconsider the loan
agreement. When you use your home as collateral for a loan, you generally
have the right to cancel the credit transaction within three business
days. This is called your "right of rescission," and it is guaranteed by
the Federal Truth in Lending Act.
The right of rescission gives
you three extra days to reconsider whether you want to use your home to
guarantee repayment for a personal loan. The right applies even if your
home is a condominium, mobile home, or house boat, as long as it is your
principal residence. The right applies to certain installment
loans -- where you borrow a fixed amount and repay the debt on an
agreed payment schedule -- as well as to home equity credit lines -- a
form of revolving credit in which your home serves as collateral.
What Rescinding a Credit Transaction
Rescinding a credit transaction means you are canceling the deal. In
other words, you decide that you do not want the loan or the service being
You can rescind the credit transaction within three days
for any reason. For example, you may find better credit terms, such as a
loan that offers a lower interest rate or does not require the use of your
home as collateral.
How to Rescind a Credit
Unless you waive your right of rescission, you have until midnight of
the third business day after the transaction to cancel the contract. The
first day after all three of the following events occurs counts as Day
1. You sign the credit contract.
2. You receive a
Truth in Lending disclosure form containing certain important disclosures
about the credit contract. These disclosures explain the key terms of the
credit being offered: the annual percentage rate; the finance charge; the
amount financed; the total of payments; and the payment schedule.
3. You receive two copies of a notice explaining your right to
You should be aware that for rescission purposes,
business days include Saturdays, but not Sundays or legal
public holidays. For example, if the last of the above three events occurs
on a Friday, you have until midnight on the following Tuesday to rescind.
During this waiting period, your creditor should not take any
action on your transaction. For example, the creditor should not give you
the money from the loan or, if your are dealing with a home improvement
loan, the contractor should not deliver any materials or start work.
If you decide to exercise your right of rescission, you must
notify the creditor in writing that you are canceling the contract. You
may use the form provided to you by the creditor, a letter, or a telegram.
Whatever form of written notice you use, make sure it is delivered,
mailed, or filed for telegraphic transmission before midnight of the third
business day. Remember: You cannot rescind just by telephoning or visiting
If you never receive the disclosures or the notice
of rescission from the creditor (see numbers 2 and 3 above), you can
cancel at any time during the first three years after you sign the credit
contract, or before you sell your home -- whichever occurs first.
What Happens When You Rescind
Within 20 days after a
creditor receives your notice of rescission, all money or property you
paid as part of the credit transaction must be returned to you. The
creditor also must release any security interest in your home.
you have received money or property (such as building materials) from the
creditor, keep it until the creditor proves that your home is no longer
being held as collateral and returns any money you already have paid. For
example, the creditor may show you a release of a lien previously filed
with your city or county clerk's office to prove your house is no longer
collateral. You must then offer to return the creditor's money or
property. If the creditor does not claim the money or property within 20
days, you may keep it.
Waiving Your Right to
Sometimes you may have a financial emergency and not be able to wait
for the creditor to slow the loan process by suspending action for three
business days. For example, you may need to borrow money quickly to have a
damaged roof or house foundation repaired.
The law allows you to
waive your right of rescission if you have a "bona fide personal financial
emergency." This enables you to have the loan process speeded up to meet
the emergency situation. To avail yourself of this right, you must give
the creditor your own written statement (pre-printed forms are not
allowed) describing the emergency and clearly stating that you are waiving
your right to rescind. The statement must be dated and signed by you and
anyone else who shares in the ownership of the home.
decisions carefully: If you waive your right to rescind, you must go ahead
with the credit transaction.
Typical Situations With
No Right of Rescission
The right of rescission does not apply in all cases where your home is
used as collateral for the loan. You do not have the right of rescission
* you apply for a loan to purchase or build your principal
* you consolidate or refinance with the same creditor a loan
that is already secured by your home, and no additional funds are
* a state agency is the creditor for the loan.
Even in these cases, however, you may have cancellation or
"cooling-off" rights under state or local law.