June, 2014
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How to protect yourself from shady mortgage lenders
Here is a good article we found, and thought we would share with the rest of you.
By Ilyce R. Glink
May 30, 2014 12:56 PM
Do you really know what you’re getting when you’re offered a mortgage?
Buyers looking for mortgages through GoLoansOnline.com thought they did. They thought they were getting an unbelievable deal on a fixed-rate mortgage at just 2.5 percent.
The reason that deal was so unbelievable: When those borrowers got to the fine print, they discovered it wasn’t real.
It turns out, the company was advertising adjustable-rate mortgages as fixed-rate mortgages. Adjustable mortgage rates are typically lower than fixed rates because they are guaranteed for a smaller, set period and then typically increase over time, while fixed mortgage rates are guaranteed for the life of the loan.
While the case of GoLoansOnline.com was relatively open and shut. The Federal Trade Commission fined them because it’s illegal to bury disclosures in fine print that contradict a more prominent advertising pitch other deceptive practices in the mortgage process can be harder to spot.
Because of all the rules, changing regulations, and moving parts associated with the mortgage process, it can be difficult for borrowers to tell the difference between a reasonable adjustment to a loan and a ridiculous one, or the difference between an average rate and an exorbitant one.
If you’re shopping for a loan, follow these five steps to protect yourself against shady lenders.
1. Know your lender.
This is the simplest and most straightforward piece of advice you can get, but that doesn’t mean you shouldn’t take it seriously.
Your best bet is someone whose business is based on referrals, who is licensed, and handles a lot of loans every month. Your lender should also ask you a lot of questions. If a lender or broker is quoting you mortgage rates without asking about your job, income and credit, you really can’t trust the quote, says Kelly Zoudo, vice president and branch manager of Des Plaines 1st Advantage Mortgage outside Chicago.
Your lender should also be willing to educate you on the mortgage and home buying processes, says Mike Copley, head of retail lending products at TD Bank.
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“Your lender should talk with you without using industry jargon, keeping it as simple, clear and concise as possible,” he says. “If anything doesn’t sound right, ask more thorough questions and if he can’t answer those politely and professionally, maybe back off and comparative shop.”
2. Know the difference between the rate and the APR.
When you’re shopping for a loan, you may be quoted both the rate, or the effective rate, and the annual percentage rate, or APR. The APR is the rate plus a bunch of other closing costs, and they vary from lender to lender. The APR will always be higher than the effective rate and it’s the rate you need to pay attention to when comparing offers, though it’s not always the rate you will be initially quoted. If your lender doesn’t automatically give the APR, always ask for it.
3. Know what “no closing costs” really means.
You may hear a lender say, “We don’t charge any closing costs.” But he may be very carefully phrasing that to make it seem as though there’s no closing costs, when in fact there are.
It’s extremely rare for you to have zero closing costs. If you hear this from your lender, you need to follow up and ask him to detail and explain all additional fees and costs beyond the interest rate–whether they’re rolled into the APR or charged separately—and who is charging them. A lender may say that he is not charging closing fees because he is not charging them, but you will still be charged closing fees by other parties. He may also hide the fees by rolling them into the APR rate, Zoudo said.
“Some loan officers will say, ‘Hey we have no closing costs,’ so you’re not bringing the money to the closing, but you are paying the closing costs,” he added.
That’s why understanding closing costs is so important.
Bottom line: “If you’re not dealing with a legitimate organization, they will have closing costs when they say there’s no closing costs,” Zoudo said.
4. Know the usual fees.
Typically you will see origination, appraisal, processing and underwriting fees, Zoudo said. These will typically add up to around $2,000. You may also be charged title fees and transfer fees, which are usually based on the cost of the home. Plus you may pay points, or put an escrow deposit for taxes and insurance. Doing a simple check online when you have your loan documents in front of you should reveal any weird or exorbitant fees.
5. Know why your offer may change.
Once you have a home picked out and the seller has accepted your offer, you can lock in a rate. Afterward, your loan shouldn’t change much, and if it does, your lender should disclose every tiny change.
“You should be suspicious with every move that is made on the loan,” Zoudo says.
Though there are some legitimate reasons for a loan to change—an appraisal comes in low or the title company the seller is using charges more than average—they’re rare and should be minor. If a lot changes before you hit the closing table, it could be a sign that your lender wasn’t experienced enough to give you an accurate quote in the first place.
Remember that you should expect great service from your lender. Because interest rates are so low right now, most companies can’t offer much lower rates to win you over. Service is the differentiator between companies, Copley says.
“It’s like any relationship you have with someone; if you don’t feel like the information you have sounds right you should ask a lot of questions and if there’s a way to validate the answers you’ve been given, do that,” he says.
Ilyce Glink is an award-winning, nationally syndicated real estate columnist, blogger and radio talk show host, and managing editor of the Equifax Finance Blog. Follow her on Twitter @Glink
