Every industry has its shining stars and bad apples. The mortgage industry is no exception. For most consumers, a mortgage will be the largest single purchase they make in their lifetime. This makes picking the right mortgage lender even more important. How do you know which companies to avoid? Look for these telltale signs.
1. Not Taking Into Account Your Ability to Pay
Your mortgage payment should be no more than 28% of your gross monthly income. It’s not the mortgage company’s job to create your household budget, but it should have a lot of questions regarding your finances. If it doesn’t, it's probably not a company you want to deal with.
2. Not Getting the Option to Purchase Points
A “point” or “discount point” is like prepaying your mortgage interest. Borrowers purchase points to lower the amount of interest they will pay on the loan. Your lender should give you the option to lower your interest rate through the purchase of points.
3. Excessive Loan Costs
Many of the loan costs are fixed no matter how much you borrow. For a larger mortgage, expect the closing costs of your mortgage to be between 2% and 5%. If you’re borrowing less than $150,000, costs could exceed 5%. Some lenders will work costs into the loan in the form of a higher interest rate, but the lender should clearly disclose that to you. Always talk to multiple lenders about the total cost of the loan they are proposing. And if the costs are well beyond 5%, ask why before agreeing to the loan.
4. Prepayment Penalties
Lenders shouldn’t charge a penalty if you pay off your loan early. Unscrupulous lenders may charge prepayment penalties of 5% or more. These fees are now illegal in owner-occupied homes. If you see it, the loan is definitely a scam.
5. Brokers and Lenders Who Don’t Clearly Disclose How They Are Paid
If you’re working with a mortgage broker, ask how he or she will be paid. Brokers are paid a percentage of the total loan and must disclose what they earn. Mortgage bankers, banks and direct lenders can charge extra without disclosing what they are making. See Advantages And Disadvantages Of Using A Mortgage Broker.
6. “Bad Credit Doesn’t Matter.”
If you see this, don’t call, don’t e-mail, and don’t say yes to anything if the company approaches you. These loans are probably “predatory” in nature and will almost certainly come with terrible terms. These types of loans normally target lower-income individuals who are more likely to have damaged credit.
7. Balloon Payments.
A balloon payment is a lump sum due at the end of the loan term. Sometimes the balloon payment can be as high as the amount originally financed. Balloon payments are no longer legal on owner-occupied homes but are still legal on investment properties. Carefully evaluate if a balloon payment is right for you.
8. Income or Home Value Inflation
A lender shouldn’t help you qualify for a loan by inflating your income or the value of the home. First, it’s not ethical or legal and, second, you can’t afford the loan anyway. If they’re willing to lie for you, they’re willing to lie to you. Not a company you want to do business with.
9. No Good Faith Estimate
Within three business days of receiving your mortgage application, a lender must provide a good faith estimate. (GFE). The GFE provides you with basic information about the loan including estimated costs of the loan. The estimate comes on a standardized HUD-GFE form that has to be used. If it comes on any other form, or you don’t receive the GFE within three days, don’t use that company.
10. Fees Different From the GFE
Your good faith estimate will contain an itemized list of costs associated with the mortgage with some very exact figures. Based on certain factors, it won’t necessarily remained unchanged when you receive the final mortgage paperwork to sign. Some of the fees are allowed to change by as much as 10%. Others shouldn’t change at all. Read the Consumer Financial Protection Bureau’s explanation of fees by clicking here. Also, read Are good faith estimates (GFEs) accurate?
The Bottom Line
The old saying still rings true. If it sounds too good to be true, it is. Don’t fall for predatory loan tactics that may put you into a loan you can’t afford that has terrible terms.
Use the many websites dedicated to helping you find the right mortgage. Additionally, talk to your bank or credit union and read How To Spot A Predatory Lender and, if you're targeting one of these, 5 Reverse Mortgage Scams.