Lender Tricks Borrowers Should Know About
Getting a mortgage can be challenging and there are many ways that borrowers can get tripped up over the course of the process. Many times, borrowers are perplexed by forms and definitions they may not fully understand and unfortunately some lenders try to take advantage of this confusion, especially if you are excited to buy a home. Lenders may not always act in your best interest which can make the process even more difficult.
Borrowers who shop multiple lenders are more likely to find lenders that act ethically and provide a high level of customer service but that does not mean you should not be aware of potential lender tricks. Tactics like offering a teaser mortgage rate, guaranteeing a specific closing date, promoting loan programs you cannot qualify for and charging unnecessary fees are examples of ways lenders can try to exploit borrowers.
Below we review lender tricks that borrowers should know about. While most lenders are honest and do right by borrowers, being aware of these practices can help save money and aggravation when you get a mortgage. The more you know about lender tricks, the more likely you are to avoid them and find the lender and mortgage that are right for you.
Teaser Rate
Perhaps the most common lender trick is to advertise a low interest rate to attract potential borrowers. This is often called a teaser rate because the low mortgage rate is used to lure borrowers but the actual rate is higher or the rate is for a different type of loan program. For example, a lender may advertise a teaser rate and include language that says the interest rate is for a 30 year amortizing mortgage, which most borrowers assume to be a 30 year fixed rate mortgage.
In reality, in many cases the lender is advertising the initial interest rate for an adjustable rate mortgage (ARM) or an interest only loan, not a fixed rate mortgage. Unlike a fixed rate mortgage, with an adjustable rate mortgage or interest only loan, your interest rate can change and potentially increase over the course of the mortgage. Borrowers that expected a fixed rate loan could be in for an unfortunate surprise if they end up with an ARM or an interest only loan.
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In other cases, the teaser rate is simply a marketing ploy and the lender makes an excuse why that rate is not available to you. This is a classic example of a bait and switch, when a lender promises one set of loan terms to get you on the hook -- or to win your mortgage business -- but then does not actually deliver those terms.
The lender may attempt to charge a higher mortgage rate when you apply for the loan or wait until later in the process when you are under pressure to close your loan. In short, if a mortgage rate seems to good to be true, it probably is.
So do not get fooled by teaser interest rates and make sure you compare mortgage quotes from multiple lenders. When you compare proposals, make sure you are comparing mortgage rates and fees for the same type of loan program. You should also understand if the rate is subject to change over the course of the loan.
The table below compares interest rates and fees for lenders in your area. Contact multiple lenders to shop for your mortgage.
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Guaranteed Closing Date
Another lender trick is to advertiser a guaranteed time frame to close your mortgage, such as 21 days. The mortgage process can be protracted so a guaranteed short time frame for closing your loan can be attractive to borrowers. In some cases the lender may be able to close the mortgage in the advertised amount of time but it is important for borrowers to be aware that there are steps in the mortgage process that are out of the lender’s control that can slow down the process. For example, the appraisal report, which is produced by an independent appraiser, can take longer than anticipated or conditions may arise through the mortgage underwriting review process that may take time to resolve.
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If the process extends beyond the guaranteed time frame, the lender may say that the original mortgage rate offer has expired and attempt to raise the rate. Borrowers should be prepared for unexpected developments in the mortgage process as it typically takes longer than expected. Borrowers should also consider locking their interest rate so they do not have to worry about the interest rate increasing over the course of the closing process.
A guaranteed closing date may be appealing to borrowers but you should consider other factors, especially the mortgage rate and closing costs, before selecting a lender.
Promote Mortgage Programs That the Borrower Does Not Qualify For
In some cases lenders advertise mortgage programs as a way to attract new borrowers even though many borrowers may not qualify for the program. For example, many lenders promote the government-backed HARP 2.0 refinance program even though many borrowers do not qualify for the program. Lenders advertise these programs and then try to sell the borrower on alternate refinance programs.
Borrowers should be weary of lenders that aggressively promote government-backed mortgage programs, such as HARP, and do research on their own to determine if they are eligible for the program before contacting a lender. It is also important to understand that you have lender options so contact at least five lenders to discuss the mortgage programs that you qualify for.
Verbal Mortgage Approval
A lender may provide verbal mortgage pre-approval but not disclose all of the conditions or documents required to complete the mortgage. In some cases, a borrower may obtain verbal mortgage pre-approval and make an offer to purchase a house but is unable to meet lender requirements later in the mortgage process so they are unable to purchase the home.
When getting pre-approved for a mortgage, borrowers should always ask for a written or electronic pre-approval letter and also understand any conditions to the pre-approval and what information or documentation is required to finalize the mortgage. This helps you avoid any unexpected disappointments later in the mortgage process.
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Offer a Short Rate Lock Period
Borrowers typically have the option to lock their mortgage rate so that it does not increase in the time it takes to process and close your loan, which can last six-to-ten weeks. Typical mortgage lock periods are for 12, 21, 30, 45 or 60 days and the borrower typically pays a higher interest rate the longer the lock period. In a declining or flat interest rate environment it may not make sense to lock your loan but in a rising rate environment it typically does.
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In some cases, the lender may recommend a shorter lock period than the amount of time required to process and close the loan. This could potentially allow the lender to increase the interest rate before the mortgage closes which will cost the borrower a lot of money in interest expense over the life of the mortgage. If you do decide to lock your mortgage make sure that the lock period is long enough to process and close your loan. That way you avoid the possibility of your mortgage rate increasing before your loan closes.
Offer a No Cost Loan and Charge a Higher Mortgage Rate
Lenders frequently promote no cost mortgages as a way to attract potential borrowers. The idea of not paying closing costs can be enticing to borrowers who are looking to save money but in some cases a no fee loan may end up costing the borrower more in the long run because the lender charges a higher interest rate.
In many cases the interest rate for a no cost mortgage is higher than the rate for a loan with standard fees, which can cost the borrower more in interest expense over the life of the loan. For example, the interest rate on a no cost mortgage may be 4.125% while the interest rate on a standard fee loan may be 4.000%. On a $300,000 30 year fixed rate mortgage, paying an extra .125% in interest rate (so 4.125% instead of 4.000%) costs you almost $8,000 more in interest over the life of your loan, which is much greater than standard closing costs.
Understand How a No Cost Mortgage Works
If the lender is offering a no cost mortgage, ask what the interest rate would be if you paid the standard closing costs, including lender fees. In most cases, it does not make sense to select a no cost loan if you are required to pay a higher interest rate. We recommend that you use our Mortgage Comparison Calculator to compare proposals with different interest rates and fees to understand the true cost of a no fee mortgage, including the total interest expense over the life of the loan.
Use ourMORTGAGE COMPARISON CALCULATORto compare loans with different closing costs and interest rates
Extra or Excessive Costs
Borrowers should be aware of lenders that charge unnecessary or excessive closing costs or fees. For example, a lender should not charge you to provide a mortgage quote, or pre-approval letter or to take your loan application. You should also be on the look out for lender fees or other costs that seem too high. Closing costs vary depending on many factors including loan size, property value, mortgage program and lender but should generally be in the range of 0.5% to 1.5% of the loan amount. If your closing costs exceed this level it could be a sign that you are paying too much or getting ripped off. One way to avoid this issue is to compare both closing costs and mortgage rates when you shop lenders so you can find the lowest combination of both.
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Advertise a Low Mortgage Rate That Assumes You Pay Discount Points
Some lenders advertise attractive mortgage rates but do not openly disclose that you are required to pay discount points to obtain that rate. The problem with this approach is that discount points are completely optional for the applicant and a lender cannot require you to pay them. Additionally, it may not be a wise financial decision for you to pay points -- especially if you are going to own your home for less than six years.
It is important to understand upfront if a mortgage quote assumes that you pay points otherwise you may not have sufficient funds to pay your closing costs. One discount point equals 1% of your loan amount so if a mortgage marketed by a lender includes two or more points, your costs increase significantly.
Before you select a lender be sure to determine if the mortgage rate they offer you includes discount points. If the answer is yes, be sure to understand the extra cost you are required to pay or find another lender that does not assume you pay points.
Sources
“What is the ability-to-repay rule? Why is it important to me?” CFPB. Consumer Financial Protection Bureau, September 12 2017. Web.