Red Flags: When To Walk Away From A Lender – Guest Post
After the Great Recession of 2008, the mortgage system has been forced to make some significant changes in the direction of protecting borrowers, but there are still a lot of ways that unscrupulous lenders can pull the wool over the eyes of their customers. If you’re in the market for a mortgage or a refinance, these five red flags should help you recognize and protect yourself from predatory lenders.
• In any sales situation an agent or associate who makes you feel rushed is out to take advantage of you. The ‘ticking clock’ attitude is designed to prevent you from having the opportunity to shop around and compare quality and value with their competitors. In the case of mortgage lenders there is also a good chance that this person will try to sneak some extra closing fees onto your loan in the hopes that you won’t have a chance to examine them.
• Walk quickly away from any lender who suggests that it is a good idea to use your mortgage or refinance to transfer unsecured, high-interest credit card debt into secured, tax-deductible, lower-interest home loan debt. While on the surface it may sound like a good decision, the risk is not worth the reward. Consumer debt is unsecured, meaning that if you are unable to keep up with payments you may be sued, but if you fail to pay your mortgage you could easily wind up homeless, or at least losing your most valuable asset.
• Interest only loans were one of the many traps that borrowers fell into before the mortgage crisis. In this situation, for the first few years (usually up to 5), the payments made on the loan will only be applied to the interest, and none to the principle balance. After the designated time period the terms revert to a more traditional form, and the monthly payments and interest go up. Unfortunately, it may be at this moment that you realize that all the money you’ve been sending in for the last few years hasn’t reduced your loan at all, and now your payments may be more than you can afford.
• With the market slowly recovering, many buyers are trying to get their purchases settled before prices fully rebound. While this is a great idea, buying before you’re completely ready can cost much more than the difference in home value. If a lender advises you that you can purchase a home with less than 20% down payment, they are opening you up to additional monthly costs of $45 for every $100,000 of home value. This mandatory premium is assessed to cover private mortgage insurance, which regulators hope can prevent a foreclosure crisis from reoccurring.
• Dealing with institutions that refer to themselves as ‘broker banks’ can be very risky as well. One of the rules passed to protect borrowers after the crash is called the Real Estate Settlement Procedures Act. This mandates that mortgage brokers disclose to borrowers the fair market price of their loan, as well as the added fees and commissions that they’ll add on top. Going through a bank or ‘broker bank,’ which funds its loans in house, means that you will have no way of knowing how much of your money is going to your loan and how much is going into someone else’s pocket.
Alan Brady is a freelance writer who focuses on issues related to law, finances, and real estate, currently writing for Attorneys.com, which helps people to find local mortgage lawyers to represent their rights.