If you're in the market for a new home loan or refinancing, be careful. Most lenders are good, reputable people who would not intentionally force you into a bad program. Some, however, would. Even a particular loan, with great features, may not necessarily be the best choice for your individual needs. It's up to you to be vigilant when shopping for finances. Here are a few 'red flags' that may warn you of impending trouble ahead:
- If it looks too good to be true, something's probably wrong. For example, the lender offers you a loan with an incredibly low interest rate; 2%, for example. No one else locally is offering such a deal. The likelihood that you'll have that rate for very long is remote, and you could be looking at negative amortization while it is in effect. You could end up owing more on your property than you borrowed.
- If the lender tells you to embellish or falsify your application information, you could be headed for major difficulties. Although it may be made to seem "not that important, not only is it grounds to reject your credit request, but if the loan is made and the misrepresentations discovered later, the financial institution could have grounds to call the loan, making it immediately due and payable.
- If your lender pushes an Option ARM at you, be extremely careful. These adjustable-rate mortgages, if not handled properly, can turn into absolute nightmares. The 'option' that you have is in your monthly payment. Generally, you can choose a fifteen- or thirty year amortized payment. Or you can opt for an interest-only amount. Your fourth choice, and the one that tends to get many homeowners in trouble, is the minimum payment. With this amount, you pay only a percentage of the monthly accrued interest. The remaining unpaid interest is applied to your outstanding balance as negative amortization. The lender touts that you can choose the payment that best fits your budget on a monthly basis. Unfortunately, most people by nature choose to make only the minimum payment, and they soon find themselves owing more on their home than it's worth.
- If there's something wrong with the documentation, look out. This warning can take the form of the lender 'forgetting' to give you the necessary disclosures prescribed by law, or you being asked to sign blank or incomplete forms. Listen, any lender who's been in the business for more than five minutes is very aware of the disclosures mandated by the federal government. You must be given Good Faith Estimates, Truth-in-Lending disclosures, and the like; lenders can be heavily fined if these documents aren't delivered to their loan customers within the prescribed time periods (many are due within three days of application). Reputable lenders aren't very likely to forget them. And it's simply common sense not to sign anything that doesn't already have the pertinent information on it. A signed document means that you've agreed to it, no matter what's on it. Don't make it that easy for them to take advantage of you.
- The lender asks you to sign a contract calling for the payment of an origination fee even if the loan doesn't close. Why should you? If the transaction falls through, you could still be liable for thousands of dollars, not to mention the fact that it removes the lender's incentive to actually work to push the loan to closing if any problems are encountered.
- If you see an arbitration clause anywhere in the paperwork, it's a license for the lender to possibly take advantage of you. This clause strips you of many of your legal rights as a homeowner, giving the lender an undue edge if a dispute should arise.
- At closing, you notice terms which are substantially different or an altogether different loan than what you previously agreed to. You always have the right to get up and walk away. Of course, the lender will be counting on your hesitancy to lose the time – and possibly money – that you have invested in the transaction. But if something isn't what it should be, don't hesitate to move on to a more forthcoming lender. Any small financial losses now will be much more than offset by not being trapped for years in a bad loan.