Warning signs of scams and unfavorable loan terms
Whether you’re looking for a mortgage because you’re buying a new home or refinancing an existing loan because of today’s ultra-low rates, it’s important to be on the lookout for potential scams. This is true for all borrowers, especially those who are facing economic hardships.
In fact, COVID-19 has led to many financial struggles for homeowners across the nation. A recent study conducted by OnePoll in conjunction with the National Association of Realtors discovered that the pandemic has caused unexpected financial distress to about 8 out of 10 homeowners.
Because scamming activity often increases during times like these, it’s important for borrowers to remain cautious. Here are some of the warning signs of scams and unfavorable loan terms:
- Sounds too easy: Watch out for loans with “guaranteed approval” or “no income verification” regardless of a borrower’s current employment, credit history and assets. Any loan that doesn’t take into account your credit history or ability to repay may be suspect. As a general rule, your mortgage payment should be no more than 28% of your gross monthly income.
- Large future costs: A high-risk adjustable rate mortgage with a payment that rises significantly after the “teaser rate” period is unlikely to make sense in today’s low-rate environment. Also watch out for balloon loans that require a large sum at the end of the loan term.
- Barriers to refinancing: Pre-payment penalties are problematic because they make it hard for a borrower to refinance and pay off a high-cost loan with a low-cost one. As you shop for mortgages, look for options that have no pre-payment penalties.
- No down payment loans: Be careful of loans split into two mortgages, with one having a much higher cost. Homebuyers should be sure they can afford the payments.
- Unethical document management: Ethical lenders and brokers will never ask you to sign a blank document or one dated before you sign.
Mortgage Shopping Tips
Shopping for a mortgage will help you obtain the best rates and terms. Start by contacting several lenders to make sure you’re getting the best price. The Federal Trade Commission recommends getting information about rates, points and fees from several lenders and comparing each.
Here are some additional questions to ask about each loan:
- Is the interest rate fixed or adjustable?
- What is the mortgage’s APR? This includes the interest and loan fees expressed as a yearly rate.
- What are the down payment requirements?
- Is there mortgage insurance on the loan and what is the cost?
The FTC also offers a Mortgage Shopping Worksheet that will help you compare loan costs from one lender to another so you can negotiate the best terms. Find this resource and others at consumer.ftc.gov under the “Homes & Mortgages” tab.
Even if you have credit problems, the FTC encourages you to “shop, compare and negotiate.” The FTC also recommends that you check your credit report for accuracy before applying for a loan. Visit www.annualcreditreport.com for a free copy of your credit report.
Tips if You Can’t Pay Your Mortgage
If you are a homeowner who is struggling to meet your loan obligations, work with housing experts and your lender to find a solution. Don’t wait until you fall behind to seek help. Acting quickly may help you keep your home and the money you have already invested into it.
The National Association of Realtors has created a brochure with tips and resources for what to do if you can’t pay your mortgage. Visit HomeownershipMatters.realtor and search for “Having Trouble Paying Your Mortgage.”
If your current lender isn’t willing or in a position to help, you may be able to refinance your current mortgage with another lender. Talk to your Realtor to see if they can help you find responsible lenders that offer fair and affordable loans. Visit MyRealtorStory.com to find a directory of Utah Realtors.