How to spot and avoid lender tricks
How to Spot and Avoid Lender Tricks- Pine Bluff Real Estate
The bottomline is this… There are immoral and unscrupulous people working in every profession, but consumers are most susceptible to being defrauded by these people in industries where there is a huge knowledge gap. Simply put…knowledge is power and that power can often be used for evil. The mortgage industry is a good example of one that has a huge knowledge gap between its customers and industry insiders and as a result borrowers can be easily exploited.
The average person knows very little about the mortgage industry, and knows even less about the credit underwriting process. Given the many “mysteries” associated with the lending process, it is relatively easy for the buyer to be taken advantage of.
Trick #1- Keep’em on the lot
A car salesman’s first day on the job they have one thing beaten into them, whatever you do…”don’ t let them leave the lot”. Dealerships don’t want the customer to leave, because there is virtually no chance of them ever coming back. Someone else is going to earn their business, and if the customer leaves your place then they are going to mark you off the list. So, the dealerships instruct their sales people to do whatever and often say whatever to keep the customer their until they are able to find out if they are a legitimate buyer of not. I saw this same tactic, although applied in a different way, used by many loan officers and mortgage brokers during my time in real estate. When you go to a lender they will often do a quick “Pre-qualification” and tell you that they can get you approved (often also mentioning a really low rate as well) so go find a house and bring them the contracts when you have an accepted offer. This essentially “keeps them on the lot”, because this buyer thinks they are set and there is no need to shop around.
First, pre-quals should never be used for anything other than understanding basic requirements for lending. What is your credit score? How much money do you make? Well based on that you should be approved for $200,000. There I’ve just pre-qualified you. It means nothing. Another form of this trick is working with a lender who knows you have borderline credit, but keeps stringing you along with promises of approval while they are working in the background to try and get you approved with their underwriters. Then once they are sure that you can’t be approved, they’ll drop you quick because there is no chance of them making any money off of you.
Trick #2- “I barely got you approved…”
The only thing worse than not being approved and being strung along by an unscrupulous lender is actually getting approved by these people. “Wait. How can being approved by a bad thing?”, you might wonder. Because trick #1 can usually only result in wasting your time and disappointing you. This trick can actually cost you tons of money.
This actually happened to another young couple I was working with, lets call them the Joneses. The Joneses had actually done the smart thing and gone to meet with a lender before they started their house search. They’d done it because they knew some late medical bills they’d had several years ago that had hurt their credit, so they wanted to make sure they could even get approved before they got their hopes up on buying a home. Again, very smart. Unfortunately they fell into the snare of a spider. They’d mentioned their problems to a friend and he knew about a guy who “helps problem credits”, so they went to see him. He pulled their credit and looked at their income, and said something to the effect of “It looks pretty bad, but I think I might be able to help you”. They were thrilled, and a few days later when he called to tell them that he had “worked his magic again” and gotten them approved they could not have been more appreciative. When he showed them the good faith estimate they were a little concerned that the rate seemed high, but he told them that was actually a great rate for someone with risky, borderline credit like theirs. That seemed to make sense, so they just put it at the back of their minds as they dreamed of their new home. After a few weeks of looking at homes, they found one that met most of their criteria and decided to make an offer.
When drawing up the offer, you have to include some information about the loan and I asked them about their pre-approval. The showed me a letter and a good faith estimate from their lender, and I was honestly shocked by what I saw. “This rate and these fees are very high” I said. They said that they understood that, but then they told me about their past credit problems and how their mortgage broker has said they were lucky to get approved at all. Its true that problems on your credit report can drive up the rates, but what did the other lenders you talked to say about the credit problems?” I asked. “We didn’t talk to any other lenders, because we assumed no one else could help us.” they said. I told them that we could go ahead and write up the offer, but I wanted them to see a loan officer I dealt with all the time just to see if they could qualify for better terms, if not they could always use this other lender.
They agreed to meet with my lender, and when I met them at the house later to do their inspection they looked like they had seen a ghost. Not only did my buddy get them approved, but he said they actually had very solid credit scores and the medical issues had been so long ago that they weren’t even reflecting negatively on their credit score anymore. The startling part of the trip was when he gave them his good faith estimate. The interest rate was over 3% lower than what the mortgage broker had offered them, and they were going to be paying $3000 less in mortgage fees. That trip to my loan officer saved them over $10,000 in the first three years they lived there and it would have made a $50K difference over the life of the loan. Oh, and this was on a $60,000 house…imagine if it had been on a $200K home. “And to think” the husband said, “We praised that guy like he was raising people from the dead, and all the while he was screwing us”.
Trick #3- Get the Seller to Pay the Closing Costs
By the time you add them all up, there are often a lot of fees and costs associated with buying a home. Origination fee here, an appraisal fee there, and an inspection fee stuck in between. Altogether they can add up to thousands of dollars, and many buyers have just been saving for the down payment or maybe the down payment and some furniture or appliances. That extra 3-6% of the purchase price just doesn’t fit into anyone’s budget. So a common practice, especially for lower income buyers has become to ask the seller to pay your closing costs (for more info on this read here), so you can just finance the closing costs into the loan. This is an option even I used when I bought my first home, and I was able to use that extra cash saved for buying some furniture. Loan officers realized very quickly this actually worked out great for them, because in the past they had to explain their fees and once the seller began “paying” the fees the buyers suddenly didn’t care about that random processing fee. This is dangerous for two reasons. A) The sellers aren’t paying the fee, you are and that is costing you equity and once you finance that fee then you pay interest on it and a few thousand dollars can turn into $10,000 quick
B) It is easy for a lender to bury fees when you finance them in
Again, if you are not having to write a check for something at closing, do you really care about an extra $500 fee? No probably not, but you should. This is real money we are talking about, and given current market conditions you cannot afford to spend even $1 extra on a home than you have to. If your lender is pushing getting the sellers to pay the closing costs then that is a huge red flag that they may be screwing you.
Ok so now you know the most common tricks a lender or mortgage broker might use, but how to defend yourself against them?
#1) Shop Around
All of these tricks rely almost solely on the premise that you will not consult more than one lending institution. That might sound like a weak premise, but my experience is less than half (my guess would be around 10%) of buyers ever go to more than one lender in their search. That is putting an awful lot of faith in one person and assuming that they are going to help you. You don’t need to talk with 5 or more lenders to keep from being screwed in the loan process, but I’d recommend meeting with at least 3. You should also mix it up, and meet with one mortgage broker and two banks just to get a good sample of the market offerings. (Here’s what you should have when you meet with them…link) Make them all give you a rate and a good faith estimate with their fees, and once you’ve chosen one I’d give the others a chance to “win” your business.
#2) Let your Realtor review your loan terms
As a real estate agent I tried to always meet with my clients to discuss their Good Faith Estimate. Your realtor should have a very firm grasp (if you chose correctly) of market norms and should be able to quickly tell you if loan terms are out of line. Even if they don’t have it all stored in their brains, they can go to their company’s files and pull dozens, if not hundreds of examples of closing statements to let you know what others have been paying recently. This information is worth its weight in gold.
#3) Don’t be afraid to ask questions
The easiest way for someone to get away with something is if you are too afraid to ask questions. Maybe you thought that there was a fee you’d never seen before or maybe the loan rate was .5% higher than what you and the lender had previously discussed, don’t wait…don’t hesitate…make them explain it right now. Often times, even a “good person” will try and see what they can get away with and if you don’t call them on it then they will not only do it to you but also the next person who walks in.