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Question & Answer
Question: We are about to go to closing with customers who are purchasing a house which will be their principle residence. The bank will make two loans secured by the house. The first loan is a 30 year purchase money mortgage. The second loan is a home equity loan. The borrowers will use the home equity loan to make the downpayment. Is the home equity loan a purchase money loan or is it subject to rescission because it is secured by the borrowers' principle dwelling?
Answer: The extension of credit used to make the downpayment is not subject to rescission. The Commentary to Regulation Z explains that if an advance on a home equity line that will be secured by the dwelling being purchased is used for the downpayment, the advance is exempt from rescission because the proceeds of the loan will be used to purchase a new principle dwelling. Although a borrower can only have one principle dwelling, there can be more than one loan used to purchase it. Each of the loans used to purchase the new principle dwelling would be exempt from rescission.
Copyright © 1997 Compliance Action. Originally appeared in Compliance Action, Vol. 2, No. 3, 3/97
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