1. “This Isn’t the Right Loan for You.”
You’ve found your dream house and now all you need is a loan. Hold everything, even if you’ve been through this drill before. When interest rates are rising and lenders’ business is slowing down, they often get desperate. The result: You may be pitched a loan that’s totally inappropriate for your needs. “A loan is a product, and just as in any business where you make money by selling a product, [loan officers] overreach in their sales pitches,” says Michael McCann, a California attorney specializing in banking law.
One mistake common to many borrowers is taking a one-year adjustable-rate mortgage because of the “sucker rate,” an artificially low rate that hops up quickly in the second year, says North Carolina mortgage broker Christopher Cruise. “All they want is to get into the home.” If you know you are going to be in your house for more than just two or three years, you ought to consider getting a delayed adjustable or two-step mortgage, which adjusts to a fixed rate after a set period. You’ll pay a higher rate at first but won’t get that immediate “bounce” that comes with most one-year ARMs.
2. “A Slightly Higher Rate for You Means a Big Paycheck for Me.”
Getting you a loan with the lowest possible interest rate is not necessarily in your lender’s best interest. Rather, he probably wants you to take the highest rate that you can afford. That’s because on top of their regular commission — usually 1% of the loan — lenders can earn an “overage” of another 1% to 2% if they sell you a loan that is more expensive than the best available deal.
Sometimes they mark up the rate by one point; other times, it’s just half a point. In any case, it adds up. One Fairfield, Conn., couple has to pay an extra $1,000 every year on their $230,000 mortgage because their loan officer sold them a 30-year loan at 9.5% — higher than the best rate that day. The reason: For charging the higher rate, the broker reaped a 1% commission from the lender — along with a 0.5% fee the Connecticut couple paid him. That’s a shame, says Peggy Twohig, Assistant Director for Credit Practices at the Federal Trade Commission. “Most consumers know enough to shop around. Lender A tells them 10.25% and Lender B says 10%. But they don’t know that Lender B can go down to 9.75% because they don’t bother to ask.” To keep this from happening, get your loan officer to show you the daily rate card — a printout that lists the lowest available rate on all of his products.
3. “Don’t Count on Your Rate Lock When Rates Are Rising.”
Even though you’ve locked in the interest rate on your new loan for 60 days, don’t count on getting the rate when your application is approved. Sometimes lenders will actually hold up your application if it means you’ll have to pay a higher rate. In 1993, the Federal Trade Commission charged Lomas Mortgage USA, one of the nation’s largest lenders, with falsely promising borrowers that it would unconditionally lock in the mortgage rate and discount points for 60 days. In fact, in many instances Lomas levied higher rates and more points within the 60-day period, the Commission charged. The Dallas lender settled with the FTC in July, 1993, and agreed to pay $300,000 in so-called “consumer redress.”
“It’s the lender who has control over how quickly the paperwork gets done,” notes Michelle Meier, a lawyer with the Washington activist group Consumers Union. “And there are always all kinds of reasons why that locked-in rate is unavailable by the time they get to closing.”
As interest rates rise, so do rate-lock complaints. Patricia Cunningham, Consumer Affairs Manager at the Illinois Office of Banks and Real Estate, says that in 1994, when interest rates were high, more than 600 rate-lock complaints came in. In 1995, when interest rates fell, so did the number of complaints — by half. In 1996, with interest rates back up again, the number of complaints also rebounded.
4.”Our APR Doesn’t Mean What You Think It Does.”
When lenders advertise their loans, they use annual percentage rates, or APRs. The APR is supposed to help you compare loans on equal terms by combining the fees and points with a year of interest charges to give you a loan’s true annual cost.
The problem is, every lender’s APR policies differ. Some include their application fees in the APR, some don’t. So two loans from different banks may have different APRs even though they have identical rates and points. To complicate things even more, APRs also vary depending on the size of the loan, whether it is adjustable or fixed, and on the lenders’ requirements for mortgage and title insurance. Not many people understand the differences, says Keith T. Gumbinger, an analyst with HSH Associates, a New Jersey mortgage research and tracking service. “We have studied it and determined that [the APR] is fairly meaningless.”
5. “We Never Met a Fee We Didn’t Like.”
It’s bad enough being nickel-and-dimed over a checking account. (“What? A $10 charge when someone else’s check bounces?”) But when banks make home loans, the extra fees can go through the roof — often to the point of being illegal.
Lenders are required by Respa, the Real Estate Settlement Procedures Act, to give you a good-faith estimate of your closing costs when you hand in your application, and extra charges are a violation of the law. But some banks try to sneak them in anyway. “I’ve seen $150 messenger fees,” says Charles Baird, an Atlanta lawyer who has represented a number of people who have sued their mortgage lenders. “I also see strange fees, like a ‘jumbo warehousing’ fee. Many don’t refer to any real service, but I see them on settlement papers all the time. Lenders tend to be very creative when it comes to fees.”
Always ask for a detailed, itemized list of your estimated closing costs when you hand in your loan application. It’s required by law. Then on closing day look carefully at the figure called “amount financed” on your settlement papers. If it does not equal the principal you are borrowing, minus any points or interest paid upfront, ask your loan officer why. It could mean he slipped some fees into the amount financed and you can guess what that means: You’ll pay interest on those charges.
6. “We’re in Cahoots With Your Real Estate Broker.”
When shopping for a product, it’s always best to get a recommendation, right? That depends on who’s doing the recommending. A real estate agent who directs you to his or her favorite lender is not necessarily offering you the best deal. In fact, there’s a chance the lender paid your broker a fee for the referral — a practice that is illegal.
In a handful of states, such as California and Minnesota, real estate brokers can negotiate mortgage loans. Depending on how well this area is regulated in your state, this could be cause for worry. Is the loan offered going to be the best deal you could get? Peter G. Miller, a former agent and author of The Mortgage Hunter (HarperCollins, $13.50), raises another concern for the buyer. “The second issue is, will my confidential financial information be transmitted to the seller? And will that give the seller a negotiating advantage?” He points out that the real estate broker is often obligated to get the seller the best possible price for the property. If the broker knows your financial background, that could prove very useful to the seller.
Other types of lending partnerships are cropping up around the country. For instance, computerized loan originators, which allow borrowers to scan selected lenders’ deals on PCs, are up and running in many real estate offices. The U.S. Department of Housing and Urban Development is currently trying to revise its regulations in this area to address issues like disclosure of the relationship between the real estate broker and the lender. The aim is to ensure that consumers can benefit from this kind of system, but are protected from any possible abuse. In the meantime, you don’t necessarily want to avoid these offers. They may be the best deals around. But “may be” are the operative words.
7. “Once You Buy Mortgage Insurance, Good Luck Cancelling It.”
You need to buy mortgage insurance because you can afford only 15% of your down payment, but your lender assures you it’s no big deal. Once your equity grows to 20%, he says, you can bag the insurance payments. Good decision? Nope.
Lenders make it sound easy to get rid of your mortgage insurance, but when that time comes, they often balk. “It’s not true that the borrower can just stop paying,” says Linda Washing, a Manager of Housing Programs at Consumer Credit Counseling Services Southwest and a former loan officer. “It’s the lender’s prerogative.”
That can be expensive. On a mortgage on a $200,000 home, with 15% down, a buyer’s mortgage insurance will cost about $43 a month, or $516 a year. With just 5% down, the cost goes up to $120 a month, which is almost three times as much, according to GE Capital Mortgage Insurance. Depending on which insurer you go with, it can cost even more. Some require an additional fee upfront — on top of the monthly payment — of as much as 1% of your loan if you put only 5% down. Since your lender typically chooses your insurer, this is probably going to be beyond your control as well.
The key is to understand the terms of your mortgage insurance obligations before you close your loan. Get your lender to explain what conditions you have to fulfill before you can stop paying for insurance. Some lenders simply require an appraisal to prove you’ve paid down 20% of the home’s value.
8. “You Should Worry About Our Finances Too.”
The chances that your bank will go under are slim, but it does happen. Shanda and Steve Falcon know all too well. It took Abbey Financial, a lender in Cambridge, Mass., six months to refinance the Falcons’ mortgage. Four days later, the deal fell apart and Abbey declared bankruptcy. The Falcons were out no small amount of money, including $1,700 they paid for a rate lock. And they weren’t the only ones. Abbey’s bankruptcy stranded 867 other homeowners in six states.
Think it couldn’t happen to you? Think again. Things have calmed down since interest rates have fallen from the highs of 1994. But Mark Thomson, a department of financial institutions assistant director in Washington State, warns that “rates could get bumped back up at any time, and the same situation would replay — if the market dries up, firms that aren’t financially stable are going to have a difficult time.” The upshot: If your mortgage banker or broker shuts down, your file may land on a trash heap and you’ll have to start your loan-hunting-and-gathering expedition all over.
9. “You’re ‘Prequalified’? Don’t Bank on It.”
Lenders will tell you that prequalified borrowers practically have their mortgage in the bag. But they often don’t mean it. Sometimes they will preapprove you based on what you have written or verbally stated with no verification. These are called “wastebasket” approvals. When it comes to actually getting a mortgage, they don’t mean anything. That final approval is dependent on verification of that information. This can mean trouble all around. Once a client of Ray Rizio, a real estate attorney in Bridgeport, Conn., went into contract with a buyer who had been preapproved by a local lender. “Three other deals went into contract based on this preapproved buyer — it was a sure thing,” he says. It wasn’t. The buyer wasn’t a U.S. citizen, he had five different employers, and he had horrible credit. “The lender didn’t even pull his credit report,”.
Happily, lenders are adopting tougher preapproval rules. But get it in writing before you make any plans based on a lender’s word.
10. “What Happened to Your Prepayments? Can’t Be Sure.”
Many homeowners pay down their principal early, bit by bit. It’s a great way to reduce your interest payments over time. But often those extra payments will sit in an escrow account — and won’t be credited toward your principal — because your lender doesn’t know what to do with them.
In 1993 Kathleen and Hal Aaron paid an extra $1,017 on their $117,000 one-year adjustable-rate mortgage for their New York City pied-a-terre. But when they got their year-end mortgage statement, there was no record of that payment. Where was the money? The Aaron’s lender had stashed it in a savings account. Only after two months of phone calls and irritation was the bank able to find the cash and put it where it belonged.