SPOCH.org - Top10WarningSigns

High Fees: Ethical brokers and lenders charge reasonable fees for their services. Unethical ones charge more than what's reasonable. On a purchase loan or refinance loan, borrowers should avoid paying fees exceeding 1 percent (not including any discount points) of the loan to the broker and/or lender. Lender/broker fees can be called a number of things: origination, underwriting, document preparation or commitment fees. The names of the fees don^t matter. They're all just cute names for "lender profit." All told, they shouldn't add up to more than 1 percent, or $1,000 on a $100,000 loan. These do not count fees paid to third-party vendors, such as appraiser or title company, or fees for environmental endorsements, flood certificates or tax services. (Without discount points, closing costs on a $100,000 loan including everything typically range from $1,500 to $2,200 and include such items as title work, an appraisal, a survey and recorder's fees.)

Steering Business to Partners: Borrowers should watch out for brokers or lenders that steer customers to particular companies for various closing services. Most brokers own or have relationships with title companies, escrow agents or appraisers. While they're allowed to suggest their sister companies or their buddies, watch out. At best, these companies may charge you a higher price than you could get by making a couple of phone calls and hiring your own title company. At worst, brokers hire companies who will lie for them in order to let a bad loan go through. (Most predatory lenders can't work alone; they need someone else, usually an appraiser or title company, to conspire with them.) Remember, a title company settlement agent (also called an escrow or closing agent) is supposed to be an objective, third-party to oversee the details of the transaction. How objective do you think he is if he's the broker's co-worker or drinking buddy? Under federal law, lenders are prohibited from requiring customers to use a particular title company, insurance company or escrow/closing agent, for example. They are allowed to require their own appraisal or credit reporting company. If they try to force you to use companies for any other services, walk away.

Watch Blank Pages: Don't sign any blank pages or forms without numbers filled in. And with the complexity of mortgage loans and the number of unethical lenders, if you're uncomfortable or unsure of some issues, consider hiring your own attorney for a few hundred dollars to review any papers you're asked to sign. You should read every word of every loan document - you'd be surprised what's in there that could hurt you later. At the very least, pay the closest attention to four things: your truth-in-lending statement, good-faith estimate of closing costs, HUD settlement sheet of closing costs and the actual mortgage note (a multi-page document with the amount financed and specific terms and restrictions). The note tells your interest rate; the truth-in-lending form shows the annual percentage rate when all fees are figured in. If the APR is more than 0.50 to 0.75 of a percentage point higher than your interest rate, there may be hidden or unnecessary fees.

Bait and switch: Brokers tell you key details such as interest rate and monthly payment. They might even show you documents with the promised numbers. But when it comes time to sign the dozens of pages for the loan, the lenders are banking that you won't realize the numbers have been changed.

Credit insurance/other fees: Just as you are ready to sign, lenders surprise you with additional fees. They count on you failing to understand that credit insurance is different from private mortgage insurance. If you object, they may tell you that the insurance comes with the loan (making it seem free) or try to scare you by suggesting that refusing to sign will delay and even jeopardize the loan.

Balloon payments: Lenders may offer to help you refinance your home, consolidate bills or avoid foreclosure by giving you a new loan with an even lower monthly rate. But many of these deals require a large lump-sum payoff, say $70,000, within a few years. Loan flipping: You decide to refinance your home to get extra cash. After you have made a few payments, the lender calls to offer a bigger loan to pay for, say, a vacation. You agree, without knowing that each time you refinance the original loan you must pay high points, fees and a higher interest rate. And if your loan had a prepayment penalty, you'll have to pay that also.

Home improvement loans: A contractor calls, offering a remodeling project at a decent price but one you can't afford. You're told he can arrange financing. After the project is started, the contractor asks you to sign a bunch of papers that may be blank or that you may be rushed through. You are warned that if you don't sign, the work won't be finished. You find later that the papers were a high-interest, high-fee home-equity line.

Biweekly payments: Lenders set you up with a loan to be paid every other week instead of once a month. Although this type of payment plan can reduce the finance charge and length of a loan, predatory lenders charge you $1,000 for the "privilege" of paying the loan biweekly. In reality, such accounts can be set up for free or a few hundred dollars at most.

Deed signing: If you are behind on your mortgage, a "lender" may offer to help find new financing. But first you are asked to deed your property over to him as a temporary measure to prevent foreclosure. But the promised loan never comes, and you no longer own your home.