Tips to help you avoid mortgage deception and fraud.
Unfortunately… they’re out there – people attempting to defraud others by presenting a fraudulent offer and pretending that it is legitimate. The same holds true for mortgages. Whether you’re house hunting and shopping for a mortgage or a homeowner looking to refinance, it’s important to keep your eyes open for mortgage scams.
First things first – the “Tease” – Meeting the mortgage broker
Some mortgage brokers and some other companies within the industry use “teasers” so that you’ll make contact and become a potential client. While such an approach may be perfectly legal in of itself, some of the ads, promotions and methods should be scrutinized carefully, including the following:
- “Zero down” or “Free.” What seems too good to be true usually is. Any promotion promising something for free should lead you to read every bit of fine print.
- “Low fixed rate.” For how long is the rate “fixed”? Is the word “low” referring to the monthly interest rate or annual percentage rate? Try to find out before reaching out to the advertiser.
- “Low payments.” Does the monthly payment increase after a limited introductory period? Are the “low payments” “interest only,” meaning your payments are only paying off the amount of interest accrued each month? This is something you need to find out right away.
- Patriotic Logos. The Statue of Liberty, a bald eagle – symbols that make you believe the company is governmental or military in nature. Don’t be fooled by such images into thinking that you need not carefully review the terms and conditions of the offer.
- No obvious “APR.” The Annual Percentage Rate (APR) is the total cost of the credit denoted as a yearly interest rate. It includes all costs such as points and processing fees. Is there an APR listed in the ad? If it is provided, is it buried in the small print? If the APR is hard to find, you should heighten your scrutiny.
- “Don’t worry if you have bad credit.” This is an incorrect statement. Your credit does indeed matter when applying for a loan. If you see phrases like this in an ad, the terms and conditions of the loan may be burdensome.
Next up – “post contact” – What to ask the mortgage company
Okay, so you’ve found a few mortgage companies you’d like to contact. What should you look for to help ensure they’re legit and have your best interests in mind? Here are a few tips to help get you started when deciding which mortgage company to use…
- They should ask lots of questions. A mortgage payment should not be more than 28% of your gross monthly income. If the mortgage company offers payments close to or over that 28%, they may not have asked enough questions about your finances. What else might they not have done?
- They shouldn’t “stretch the truth”. A mortgage company should not exaggerate the value of a home or inflate your income in order for you to qualify for a loan. If it does, is this really a company you can completely trust?
- They shouldn’t overcharge for closing costs. You should expect to pay between 2% – 5% of a home’s purchase price in closing costs. If your mortgage company wants more, question them before writing a check (or before they incorporate these costs into the loan).
- They should offer discount points. Paying these “pre-paid” points can help lower your monthly payments and save you a lot of money over the term of the loan. If your mortgage company doesn’t offer you these points, ask why.
- They should use a standardized HUD-GFE form. You should receive a Good Faith Estimate (GFE) containing an itemized list of exact mortgage costs within 3 days of the mortgage company receiving your application. If it takes longer and/or it’s not provided on a standardized HUD-GFE form, this could be the first sign of trouble.
Once again, “if it sounds too good to be true, it probably is.” Keep that in mind if a mortgage company promises you the world. If you have encountered a company peddling deceptive claims, it could cost you a lot more than you can afford.
What mortgage experiences are other house hunters and refinancers dealing with? Find out any time at myFICO forum.
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