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Tricks Used by Mortgage Loan Providers

Why would I write about a topic like this? Well, because a watchful eye can save you a lot of money now and in the future. Beyond that, I don’t play these games and I want you to be aware of those that do!

A central problem in shopping for a mortgage is that the loan officer knows far more than the borrower regarding mortgages and the corresponding processes involved with closing them. Because of this, you need to know the tricks used and how to protect yourself against them.

Low-ball Offers: To draw customers, some brokers and lenders will advertise low-ball prices that they have no intention of honoring. Once they get you in the door, they will play bait and switch, which is a game commonly known to be played by some appliance merchants and others who advertise a low-ball price but when you arrive at their store they happen to be out of the advertised special and try to interest you in something else. A similar version of this game involves keeping you on the hook in the hope that market rates might drop enough to make the advertised special profitable.

Protection: Don’t respond to any ad that quotes a price 1/2 point or more below the lowest price offered by anyone else.

Bait and Remember: Some mortgage brokers and lenders will fail to mention certain fees until the borrower is in too deep to bail out, then WHAM! they remember them.

Protection: Require the broker or lender to provide a written list of all fees to be paid by you, including known payments to third parties such as credit reports and appraisal fees. It should also include an estimate of all prepaid items, estimated escrow deposits (if any) and charges by third parties unconnected to the lender which may not be 100% accurately known until later; an estimated cost is better than simply leaving it blank until it is known at a later date. Further, you are neverreally in too deep to bail out; call me and I can help you find a way out!

Charge a Rate Lock Fee But Don’t Lock: Some mortgage brokers will charge borrowers to lock the rate and points that you have agreed upon, but not inform the lender. If interest rates don’t rise, the broker pockets the lock premium, and if they do rise the broker falls off the face of the earth. This is much less of a hazard when dealing with a direct lender – Envoy is a direct lender that doesn’t charge anything to lock a rate for 60 days or less! All we need is a property address and we can lock it on the spot!

Protection: Insist on seeing the loan commitment letter or other written documentation from the lender who has allegedly locked your loan. You should not deal with a mortgage broker or lender who won’t agree to show you this in writing.

No-cost Loans That Aren’t: Loans with high rates for which lenders will pay points are sometimes advertised as “no-cost” loans, which they are not. They are zero point loans, but there may be substantial fees of other types. False advertising is not limited to brokers.

Protection: Check the APR on the Truth-in-Lending Disclosure Statement. On a true no-cost loan, the APR should be the same as the interest rate. If the APR is significantly higher, it is because there are substantial fees involved.

Interim Refinance: Borrowers who want to refinance a mortgage that has a sizeable prepayment penalty may fall prey to the interim refinance tactic. The first refinance is for an increased loan amount that includes the penalty but carries a high rate, while the second, occurring several months later, lowers the rate. The borrower does avoid having to pay the penalty in cash, but the cost of the penalty that was rolled into the first new loan, combined with the costs of closing second new loan, wipes out most or all of the gains from refinancing in the first place.

Protection: Just don’t do it; wait until the pre-payment penalty expires to close the new loan with the low rate or refinance to the lower rate the first time. Any interim loan is a scam.

Contract Trickery: Borrowers who accept whatever they are told may fall prey to contract trickery – the incorporation of a provision in the loan note that is favorable to the lender…without mentioning it to you, the borrower. Lenders will usually pay an extra 1-2 points to the broker for a prepayment penalty clause to be added to the note, so the broker who includes it in the contract without your knowledge can put the point in his pocket — rather than in yours, where it belongs. Loan officers working for lenders might do this as well.

Protection: Read all documents carefully at every stage of the process; if there is not a prepayment penalty, it will be shown on the Truth in Lending Disclosure Statement; if there is a pre-payment penalty, it may be shown on the same disclosure. If you see something that looks like there may be a pre-payment penalty, you should ask for written proof that one does not exist.

Note: This article has been “chewed up and spit out” so many times that I cannot rightfully tell you who the original author is. I have added a lot of information to it and paraphrased several articles over time, but parts of it are still available on the internet through many different sources; if you know who the original author is, please contact me so that I can get them the credit they deserve! In the interim, Thanks to the Unknown Author!

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