Six Common Home Loan Scams to Avoid

Given how easy it is to get ripped off on a Florida home loan, it’s almost amazing that anyone ever ends up buying a home.

But people do. A lot. Then they buy a second home. Then they refinance their primary residence. Then they do so again, or a third time, or take out a line or credit. Maybe a Florida home equity loan.

Clearly, people think this is easy. But are they getting the best deal, or are they paying more than they have to due to the tactics of shady lenders or out of their their own ignorance?

We believe the more you know about common mortgage scams, the better off you will be when negotiating and hammering out the terms of your deal. Here are some of the more common ways that lenders and brokers take advantage of their customers, and what you can do to avoid becoming the next victim of predatory lending.

NOT HONORING A RATE LOCK
When Florida home loan rates are volatile (like, say, right now), it’s a good idea to “lock in” a rate so you don’t face a higher payment if rates rise during the time it takes to the paperwork on your loan. A lock is a commitment by the mortgage lender as you fill out your application, providing you a certain rate for a specific time, often in exchange for a fee.

Here’s the kicker: A lending officer or broker may imply, or even state matter-of-factly that your rate is locked. But that and $2 will get you a large Dunkin Donuts coffee.

Get it in writing. Get it in writing. We repeat ourselves because it’s important! You’ll want it on paper if you ever end up in court. And, even if you get that written agreement, you’re not necessarily out of the woods if the lender “loses” your paperwork. If you think an unethical mortgage company wouldn’t do that to avoid honoring a commitment, you’re kidding yourself. If they delay the closing until the lock expires and you’re faced with accepting a higher rate, there’s little you can do.

How can you protect yourself?

• Use a Florida mortgage company that a friend of yours used and whose services they were pleased with.
• Do some investigating. Look up and see if a lender has complaint records with local and state regulators.
• File all the paperwork in on time. Don’t give them an excuse to stall.
• Raise a little hell if needed. If it looks like your lock is set to expire before your loan is closed, demand to speak to a supervisor. Every day, or every hour if need be. Say you’re going to complain to state regulators if your lock isn’t honored, and do so if necessary. Threatening legal action will probably make them quit playing games — after all, a lot of customers won’t kick up any fuss at all when they’re getting ripped off.

USING YOU FOR A BONUS
Let’s say you call a mortgage broker and are quoted a rate of 6.5 percent with no points on a 30-year, fixed-rate Florida home loan. And, by the time you’re ready to lock in, the lender’s rate has dropped to 6.25 percent, but the broker doesn’t tell you that, instead locking you in at 6.5 percent as originally quoted. The broker, in turn, gets a bonus of a few grand from the lender, while you get saddled with higher payments.

Amazingly, this is usually legal as long as it’s disclosed. You typically don’t find out about it until your mortgage is about to close, however, and in addition, the disclosure is usually buried deep in the paperwork. Payments from lenders to brokers for selling higher-cost loans are known as “yield spread premiums,” and are remarkably common.

How can you protect yourself?

• Know what a competitive offer looks like.
• Get all your loan quotes on the same day. A good idea anyway, as rates do change constantly, and rate-shopping over an extended period can hurt your credit score.
• Ask lots of questions. Demand to know how much the broker, if you are using one, is making from the lender as well as from fees you might be paying. It is advisable to get this information up front and on paper.

SAYING THEIR LOW RATE IS UNIQUE
If you do the grunt work, you will be able to tell when a mortgage rate is too good to be true. If a lender is offering a rate considerably below the competition, there’s going to be a catch. Hidden fees, a teaser rate that quickly expires, super-high credit standards, etc. The best way to find a straight shooter — and the best possible deals on Florida home loans — is through referrals and your own research. The same is true when refinancing.

Also, be up front about yourself if you want to get the straight facts in return. If any of the following aren’t true, you should let your lender or broker know in advance so you can an accurate quote:

1. You have a good credit score.
2. You have gainful employment.
3. You can document your income and assets.
4. You’re a U.S. citizen or permanent resident.
5. You’re planning to live in the home, not rent it out.
6. You have a down payment of decent size, as well as enough cash on hand to the cover closing costs.

SELLING YOU ON NEGATIVE AMORTIZATION
Most loans require you to pay down equity over time, so that your balance shrinks each year. But options such as interest-only loans typically don’t require principal payments for the first 5-10 years. Some adjustable-rate Florida home mortgage loans, moreover, actually allow what is known as negative amortization, where your balance grows, rather than drops.

Essentially, the low payments you are so awed by today on the $200,000 loan you just closed could mean you’ll owe $210,000 five years from now. Eek.

Any time you get an adjustable-rate mortgage, you should ask a lender for a schedule that shows how high your payments can go and how much you’ll owe after five years, after 10-15 years, and all the way up until maturity. If you have more than one repayment option, ask for a schedule for each. Don’t listen to arguments that rates “won’t” or “can’t” hit their caps or go up by more than a certain amount.

Unless your name is Ben Bernanke, nobody can predict interest rates.

BLATANT LIES REGARDING RATE CAPS
Another problem with flexible-payment ARMs is that people are getting more and more confused about caps. The typical ARM allows your interest rate to rise no more than 2 percentage points a year, or 6 percentage points over the life of the loan.

But many people with flexible-payment ARMs think they have lifetime interest-rate caps of 7.5 percent, either because they didn’t understand what they were being sold, or are deliberately misled. Be sure to get a schedule of all allowable rate fluctuations your Florida home loan is susceptible to, and to go over the fine print with a fine-toothed comb.

A NO-COST LOAN THAT ACTUALLY COSTS A LOT
Remember, if it sounds too good to be true, it probably is. Remember that every home loan has a set of costs. Appraisals, title insurance, inspection, underwriting, and so on. The lender may be tacking the fees on to the loan principal, or charging you a higher interest rate than you would have paid had you just covered the costs yourself.

You might very well want to pay a higher rate for no-cost Florida home loans if you plan to be out of the home in a year or two, and if you really understand what you’re “saving.” But if you plan to stay longer, it’s often a better idea to just suck it up and pay.