Beware of the Bait and Switch Mortgage Strategy

Beware of the Bait and Switch Mortgage Strategy-150x150The real estate market has its share of crooks and scammers just like any other industry. Unfortunately, the ones getting scammed are usually hard working Americans who just want, like most people, to become home owners. Becoming a home owner is difficult and expensive enough without getting tricked by lenders and mortgage brokers, so you will have to pay a lot of attention when buying a home, especially if it is your first time doing it. If you are not careful, you can end up with a mortgage that is much more expensive than what you can afford, and you will have to struggle to make your mortgage payment each month, or eventually have to abandon your home.

What is the Bait and Switch Mortgage Strategy?

When buying a home, you can encounter dangers at every corner: from thieves posing as lenders or lawyers, who usually prey on the elderly, to the old bait and switch. Bait and switch happens when a customer is offered something for an attractive price, also known as the bait, which will no longer be available when the customer decides to go ahead and make the purchase. After the customer realizes that the initial offer is no longer available, he or she will be presented with a new offer, with less attractive terms, also known as the switch.

Lenders usually do the bait and switch by advertising low interest rates in order to get many potential home buyers interested. These interest rates are promoted in newspapers, on TV, on the radio, on billboards and posters, but, when the customer shows up and applies for a mortgage, he or she is told that those were last week’s rates or that they are reserved only for those with very high credit scores and a very good financial situation. Of course, because bait and switch is illegal, lenders disclose all this in the small print, which is usually too small to read in a newspaper, moves too fast to be read on TV, or is simply disregarded by most people who are looking for a mortgage.

The truth is that interest rates change too often for the advertisements to be truthful. Commercials on TV and the radio are very rarely modified to display the correct interest rate, so they may run for a couple of months advertising an interest rate that was offered a long time ago, and the rate can be much higher at the present time than it was before. Even live interviews advertise rates that are at least a few days old. When home buyers call the lender to inquire about the low interest rate, they find out that the rate is no longer available, but are offered a new rate. This new rate won’t be as great as the one that is advertised, but is usually not that much higher. However, a small increase in interest can mean thousands over time, so make sure that you understand how much more you will be paying before taking the lender’s offer. Ads in newspapers are also at least one day old because it takes at least one day for the newspaper or magazine to get published.

In a perfect world, interest rates would not be advertised unless they were actually available for everyone. While some lenders are truthful when advertising interest rates, most take advantage of things like fine print and are just happy to get customers interested, even though they are unable to offer what they promised. Unfortunately, many home buyers fall for the bait and switch due to the fact that many lenders are doing it. When searching for a mortgage you should give yourself time to shop around and find what’s best for you, and not let lenders use the bait and switch mortgage strategy on you. If you are not satisfied with a lender’s offer, always be ready to turn around and walk away.

Here’s a Quick Way to Move Past Being Denied- Find Another Lender!

Heres a Quick Way to Move Past Being Denied- Find Another Lender- 150x150Settling on the first lender that you come across is never a good idea. Only by shopping around can you find mortgage loans with lower interest rates and attractive terms. You will have to look at all the characteristics of the mortgage loan in order to find the one that suits you best or you may end up spending more than you have to.

Looking at mortgage offers and finding a lender which can give you the best interest rate and terms on a mortgage loan is important when trying to become a home owner. But even more important is finding a lender who is willing to give you a mortgage loan, especially if you have a low credit score. Every lender has its own qualification requirements, which can differ greatly from one lender to another. Factors such as your credit score, debt, income, and the area in which the property is located in all have a large influence on whether you are going to be approved for a mortgage loan and how much you are going to have to pay.

Lenders may advertise low interest rates and lenient approval standards, but you will probably have an unpleasant surprise once you apply for a mortgage and find out that the advertised rates are reserved for those with perfect credit scores and high incomes.

Why Will Some Lenders Deny your Mortgage Application?

Most mortgage loans already have their requirements established by the government agency that is backing the loan. Government-backed loans are associated with these agencies: Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA), and the United States Department of Veterans Affairs (VA). The fact that the loans are backed by these government organizations is not considered enough of a guarantee by lenders, so they have their own, stricter requirements.

One of the loan requirements that can result in a mortgage application denial is your credit score. The Federal Housing Administration can guarantee mortgage loans for buyers with credit scores as low as 500, but most lenders will deny all applicants who have a credit score that’s lower than 600. Also, most lenders have special requirements for those who don’t have a perfect credit score. For example, borrowers with a credit score that is under 680 may be required to provide additional documentation related to their financial situation.

In order to qualify for the FHA Streamline Refinance, you must pay your mortgage on time for 12 months without missing a payment. But the lender who will refinance the loan will have additional requirements, such as checking your credit score and income.

Fortunately, not all lenders have the same requirements, which means that you can easily be approved by a different lender, or even get better terms on your mortgage. Generally, smaller lenders and credit unions seem to be more flexible than large lenders, especially if you give them reason to believe that you are not a high default risk, even if some aspects of your financial situation are not in good shape. Mortgage brokers can also help you find a mortgage loan if you think you can’t do it on your own. They charge a fairly large fee, but it may be worth it, especially if you have a strong feeling that most lenders will deny your application.

Part 2: How to Procure Financing for Investment Properties

 Part 2- How to Procure Financing for Investment Properties-150x150Question: Which type of lender should you target for a real estate loan?

Answer: There are several types of real estate lenders out there. With all of the options, it can be difficult to make a decision as to the best choice for your situation. Whether you choose a mortgage bank, mortgage broker, or other type of lender, there are pros and cons associated with each. Let’s take a look at the advantages and disadvantages of each to find one that works for you!

Types of Real Estate Lenders

1. Mortgage banks- Mortgage banks sell their products in the secondary market. Once you complete an application for a loan, the bank’s employees will carefully review your application and then make a decision.

Advantages of mortgage banks

  • Speed- mortgage banks process loan applications faster than all other providers.
  • First time program implementers- if the federal government launches a new program, mortgage banks are always the first ones to implement it.
  • Reliability- a local mortgage bank is an established institution. It has strong ties with members of your community and follows state and federal regulations to the ‘T’.
  • Savings- since a mortgage bank is the loan originator itself, you will end up with a lot of savings on the loan offer based on the mortgage terms and your deposit in the bank.

Disadvantages of mortgage bankers

  • Limited options- mortgage banks only offer their programs. They tend to be inflexible to the borrower’s needs.
  • Economies of scale- a mortgage banker may not bother to listen to you extensively because of the large customer base. They can be bureaucratic at times.

2.    Mortgage brokers- Mortgage brokers are middlemen who have access to mortgage loan information from different lenders across the country. A broker aims at finding you a loan that matches your needs. After loan application approval, you can get in touch with the lender directly.

Advantages of mortgage brokers

  • Savings- you may definitely access a mortgage at a very low cost because a broker has access to a variety of lenders.
  • Variety- a mortgage broker simply finds you the best loan product that matches your needs because they compare hundreds of lenders.
  • Speed- since brokers are professionals in their field of work, they get you the right lender very fast.
  • Easy qualification- an experienced mortgage broker will even assist you in putting together the required paperwork before directing you to a lender who will easily accept you without hassle.

Disadvantages of mortgage brokers

  • Hidden charges- many mortgage brokers increase their profits by including their price in the loan offer.
  • Not guaranteed estimates- many mortgage brokers rush to seal the deal so that they can walk away with a profit. That’s why they may present you with an offer that does not necessarily coincide with the bank’s terms.
  • They may not compare all lenders- mortgage brokers may not compare all lenders in order to find you the best offer. Moreover, some lenders don’t deal with brokers.

3.    Commercial banks and credit unions- The most popular lender in the world is a commercial bank. Credit unions in the United States are also popular. Understanding their upsides and downsides can help you in making an informed decision.

Advantages of commercial banks and credit unions

  • Competitive rates- compared to other traditional mortgage lenders, commercial banks offer competitive interest rates with very reasonable repayment terms.
  • Always available- since commercial banks have to keep their customers’ money working and earning interest, they are always available at your service.
  • Better terms- commercial banks offer affordable and friendly loan terms compared with a traditional mortgagor.
  • Customers are the actual owners- both commercial banks and credit unions treat their customers very well because they also have a stake in the company.
  • Credit unions are actually non-profit institutions- the aspect of non-profit basically means that they share their profits with their customers. You also get to save in taxes because credit unions are exempt from federal tax.
  • More savings- in addition to the lower fees that a loan from a credit attracts, you will also benefit from lower interest rates as long as you have a high credit rating.

Disadvantages of commercial banks and credit unions

  • Delay in loan approval- if you need access to your loan very fast, then a commercial bank may not be the best option because they take a long time to approve loans.
  • Tough qualifications- commercial banks have tough requirements for low-interest loan qualification, which typically includes excellent credit score requirements.
  • Limited access to new technology with credit unions- credit unions sometimes aren’t up to speed technologically, which may make it difficult at times for you to access their services when needed.
  • Restricted membership- credit unions center their focus on particular communities, professions or groups of people. This can make it difficult to find a credit union for which you qualify.

4.    Real estate agencies and home builders- There are many real estate agencies and home builders. A number of them are affiliated with mortgage brokers and bankers. Additionally, their services can be accessed online.

Advantages of real estate agencies and home builders

  • Pricing prowess- real estate agencies can easily tell how much it will cost you.
  • Experience- approaching home builders gives you assurance of the best residential property because of the experience they have in developing such property.
  • Speed- home builders working together with real estate agencies process your loan request very fast.
  • They do all the paperwork- if you are not very familiar with real estate jargon or not experienced with paperwork, then real estate agencies may be the best for you because they will handle the loan documentation paperwork for you.
  • No closing problems- there are several pitfalls that can kill a deal in its final hours of execution. Real estate agencies ensure that your property is in order.

Disadvantages of real estate agencies and home builders

  • Ethical considerations- some agencies may not consider all of the professional ethical considerations in conducting their business. This may land the investor in trouble with legal authorities.
  • Extra charges- since real estate agencies and home builders don’t directly deal in the money lending business, using those results in an extra cost because they are middlemen.

5.    Internet lenders- The internet is a business powerhouse worldwide. Many lenders have flocked to the internet, giving people  access to a loan at competitive rates.

Advantages of internet lenders

  • Easy access- shopping for an internet lender is very easy because you can do it from your PC or smartphone. You can access them 24 hours a day, 7 days a week.
  • Competitive rates- unlike other mortgagors who have a physical office, they save you extra costs because they don’t pay property taxes and other overhead costs.
  • Comparative base- there are many online sites where you make comparisons on loan amounts awarded, interest rates and repayments.
  • Convenience- you can apply for a mortgage from an internet lender any time you want and wait for approval from the lender without strict deadlines.

Disadvantages of internet lenders

  • Lack of personal advice- since you don’t meet the lender face to face, a lack of personal touch may not be the ideal experience for you
  • Scams- there are many illegitimate internet lenders who may con you and disappear with your money when you give them your personal information.
  • Out of date sites- there are many online lenders’ sites that remain out of date. This may not give you the right idea of current mortgage rates today.

As you can see, there are many options for you when it comes to choosing a lender. This information should give you a complete overview of what to expect with each lending option. Look out for part 3 of this question, where we discuss lenders for both commercial and residential investment loans as well as what lenders are looking for in borrowers.

 

Hidden Dangers in Lending: What Isn’t Disclosed to Borrowers

Hidden Dangers in Lending- What Isn’t Disclosed to Borrowers-150x150The Truth in Lending Act was introduced in 1968 as a way to promote fair lending practices and to protect borrowers who deal with lenders. The most important part of the Truth in Lending Act refers to what type of information has to be disclosed to the customer before giving them a loan. This information must be presented to the borrower in writing before closing the loan, and possibly even on the monthly billing statements.

The main goal of the Truth in Lending Act is to protect borrowers from unethical lending practices. This act makes it illegal for lenders to withhold important information regarding your loan, therefore protecting you and the economic activity that influences several parts of the economy, such as the housing market, which relies strongly on people who make purchases using credit cards or loans.

What Is Disclosed

The Truth in Lending disclosure statement must include a few important elements of the mortgage loan that you are closing. Understanding the contents of this document will help you better understand what your rights and responsibilities are. The Truth in Lending disclosure statement is only used for fixed-rate loans. Because the interest rate fluctuates on an adjustable-rate loan over its lifetime, it is impossible to determine how much the payments and interest rate will be. Here’s what the Truth in Lending disclosure statement contains:

  • The financed amount. This represents the amount that you are borrowing. This amount doesn’t include the interest rate, but includes other charges that are part of the loan which will be removed from the total if they are paid up front.
  • The Annual Percentage Rate (APR). The APR is going to be the interest rate plus a few additional costs that you are going to be paying.
  • The finance charge. This is the total amount that you will be paying on top of the financed amount, and it only changes if you make late mortgage payments and penalty fees are added, or in case you pay off your loan earlier than scheduled.
  • The total payments. This is the total amount that you will pay over the life of the loan. It includes the financed amount, the interest rate, and all other costs.
  • The prepayment penalty. Some mortgage loans include a clause that requires you to pay a penalty if you pay off the loan before a certain period of time.
  • The payment schedule. This part of the Truth in Lending disclosure statement explains how many payments you will have to make until the loan is paid off, and how much your payments will be.

What Isn’t Disclosed

Federal law doesn’t require lenders to disclose certain aspects of your loan. Some lenders choose to disclose these aspects, but it is mostly your duty to find them out before closing a loan. Here are some of the most important parts of your loan that may not be disclosed by your lender:

  • All of your lender’s fees. Unlike fees such as mortgage points, which are charged as a percent of the total loan amount, other fees that your lender will charge you are not based on the size of the loan. What’s worrying is that, even if you figure out what these fees will cost you, the lender will not be committed to that amount and can charge you more at closing. A good way to counter this practice is to ask your lender to give you a signed document which includes all of the fees that you will be required to pay.
  • The margin. Only applicable to adjustable-rate mortgages, the margin is the percent that the lender will add to the interest rate when the rate is adjusted. You will be made aware of what the interest rate will be, but not the lender’s markup, so it’s a good idea to ask them to give you the margin in writing as well.
  • Simple interest loans. Find out if the interest rate on your payments accumulates daily or monthly. In case you have a simple interest loan, the interest rate will accumulate daily, which means that you will have to pay some large penalties if you fall behind on a monthly payment.
  • Subordination policy. You may be prohibited from refinancing your first mortgage by the lender of your second mortgage. Subordination policies vary from a small fee to prohibition, so you should find out what the lender’s subordination policy is before taking out a loan.
  • Mortgage insurance. Normally, people who can’t afford to make a 20 percent or more down payment are required to pay mortgage insurance. Unfortunately, if you are not careful when closing a loan, you might be required to pay mortgage insurance even if you put the 20 percent down. Make sure you find out if you are required to pay mortgage insurance before signing anything.

When taking out a loan, keep in mind that while the law is mostly on your side, it doesn’t cover all aspects of the loan. The lenders are required to disclose elements of the loan that are very important, but there are others that are not disclosed. While some of them may not matter much, there are some hidden dangers that will end up costing you money over time and provoke unnecessary stress.

Top 10 Questions to Ask Your Lender

Model House and a MortgageThe most important step in the home buying process is choosing the right lender. Working with a good lender will guarantee that your home purchase will be successful and relatively hassle free. The quality of service will not only make a difference in how good you are treated, but also in how much money you save. When choosing a mortgage lender, you shouldn’t focus only on interest rates and closing costs, but also on customer service, fees and understanding what your rights are. That is why you should always be prepared before meeting with a lender. Knowing what questions to ask can make the difference between you getting a good deal or a bad deal, and will save you a lot of trouble in the long run. Before you get started, get pre-qualified or pre-approved for loans to make securing a loan an easier process.

How to Find a Good Lender

Before starting your search for a mortgage lender, make sure that you know your budget and the type of loan that you are looking for. Once you have all that figured out, you can start shopping around and comparing lenders. Here are a few things to consider:

  • Reputation. There are plenty of mortgage companies available nowadays. Some of them are big and with a long history, and some are smaller and fairly new. Just because you never heard of a mortgage company doesn’t mean you should automatically dismiss it. Whether it is a well-known or a less known company, you should always do your homework. Check their ratings and feedback with the Better Business Bureau (BBB) and the local Chamber of Commerce, and try to find out as much as possible about them.
  • Customer Service. After choosing a lender, you are going to be working with them for a long time, from when you first apply for the mortgage loan until the closing, and beyond. You should feel comfortable working with your lender, and they should be available to answer all your questions and concerns. If you feel pressured into signing a contract before you are ready, you should look for another lender.
  • Product Selection. Before applying for a mortgage loan you should have an idea of what types of mortgage loans you are considering, especially length-wise. Top lenders offer the most popular mortgage products and will work with you to determine what your best choice would be.

What to Ask Your Lender

Once you have found a few lenders that you are considering working with, make sure you ask them these 10 questions before committing to one of them. If you don’t like the answers that you receive, keep looking until you find a lender that you feel more comfortable with.

  1. Which type of loan is the best for me? A good lender will look into your financial situation before recommending a mortgage loan. Then he or she will explain the differences between each type of loan, and work with you to make sure you choose the one that best suits your budget. 
  2. What will my interest rate be? Depending on what type of loan you choose, your interest rate might be fixed, adjustable, or a combination of both. Keep in mind that the interest rate on a fixed rate mortgage loan will remain the same throughout the life of the loan, unlike the interest rate on an adjustable rate mortgage loan which can increase or decrease multiple times until the loan is paid off.
  3. What will the closing costs and fees for the loan be? Lenders are required by law to provide a good faith estimate which will include a list of fees and costs associated with the loan, such as the appraisal fee, taxes, credit report, the loan application fee and more. Some of these fees can be reduced, or even waived or refunded, so make sure you speak to your lender about that, too.
  4. How much will my down payment be? Some loans require that you pay a 20 percent down payment, but there are others that require a lower percent. The amount that you put down affects how much you can borrow, your interest rate, and the monthly payment, but the down payment mostly depends on your budget. 
  5. What are the qualifying guidelines? Once you choose a type of loan, you should find out if you qualify for it. The qualifying guidelines can relate to your credit score, income, employment status, or properties that you own. Certain programs, such as ones for first time home buyers, offer easier qualifying guidelines.
  6. What documents do I need to provide? Depending on the lender, you will have to provide documents such as proof of assets and income, federal tax returns, a list of credit cards and loans, and others. It’s a good idea to start gathering these documents early, because some of them may take a little while to get a hold of.
  7. How long will it take to process my application? It usually takes between 45 to 60 days for the loan application to be processed. This depends on how quickly the lender can appraise the property and verify your credit report, employment status and bank accounts. You should get loan pre-approval to make things easier. 
  8. How much will my monthly payment be? The amount that you’re going to be paying each moth depends on the type of loan, the interest rates, and the down payment. The lender can switch things around so that your monthly payment will be something that will fit your budget. You should keep in mind that a lower monthly payment doesn’t also mean a lower overall cost of the loan. 
  9. Will I be able to lock the interest rate? The interest rate can fluctuate by a lot between the time you apply for the loan and the closing. Locking the rate will ensure that the interest rate doesn’t increase by the time the loan is closed. It is also important to ask your lender if there is a fee associated with locking the rate. Look here for a list of the top fixed rate mortgage lenders
  10. Is there a prepayment penalty? Prepayment penalties are no longer allowed in some states, but it’s always a good idea to make sure before signing anything. If you think there is a chance you might want to pay off the loan before its due date, find out if there is a prepayment penalty and decide if you are comfortable with it.

Don’t take your mortgage lender choice for granted. Asking these questions will not only help you find out more about different lenders, but it will also show them that you are informed and willing to do research and shop around before committing.