Finding a mortgage lender you can trust isn't difficult, but it doesn't mean you shouldn't be careful. Especially with the tightened credit in our current economy, homeowners need to be aware of who they do business with and who to avoid. Below is a short list of twelve warning signs a homeowner can spot to detect possible predatory lenders. By going through the list, you'll have a good idea of what to expect, and also who to avoid.
Top 12 Warning Signs of A Predatory Lender
1) The Mortgage Lender or Broker Lacks Substantial References
References are one of the best ways to find a reputable mortgage lender, and it's also one of the easiest ways to spot a bad one. You can start at home by looking up online reviews, the Better Business Bureau database, and even reading up on past client experiences. Although not a definite rule, most reputable mortgage lenders will have some kind of solid foundation based on previous client's testimonials. If you can't seem to find anything on your own, ask your lender directly for a few references. And if you happen to stumble across a negative review, continue shopping, or be very cautious at the least.
2) Are You Being Steered To A Specific Mortgage Lender?
A red flag should be raised if your agent or builder is intentionally pushing you hard towards a specific mortgage lender. Though most times an agent just wants you to have a good lender who will get the job done smoothly, some have less-than-altruistic reasons for their recommendations. Possible incentives can include mortgage fraud assistance, larger commission incentives, and illegal "kickbacks". In the recent case of subprime mortgages for example, many borrowers were unnecessarily steered to such mortgages because of easier underwriting guidelines and larger commission checks.
3) Are You Being Pressured To Make False Statements?
Pressure to make false statements should be a flagrant warning sign, but it can sometimes go unnoticed. Many times, it may seem like your mortgage lender is actually just trying to help you. But, make no mistake that falsifying statements on a mortgage application is considered fraud, and can result in criminal penalties for you and the lender. A predatory lender might ask you to exaggerate your income, embellish your employment history, alter your source of down payment funds, or conceal existing debts. Especially in such loans such as an FHA home loan, lenders may consider alternate compensating factors towards your mortgage application--it's your responsibility to make sure the information you present is accurate and legitimate.
4) Are You Being Pressured to Borrow More Than Originally Planned?
Especially in this economic climate, be sure not to over leverage yourself financially. Predatory lenders prefer that you borrow more because it means higher loan amounts; translating into bigger commission checks. Whether you're considering an FHA loan or a home equity loan, be wary if your lender attempts to persuade you into borrowing more than necessary.
5) Look Through The Eyes of A Predatory Lender--Are You A Vulnerable Client?
Unfortunately, predatory lenders and unscrupulous individuals have been known to prey on the weak and vulnerable. In the mortgage industry, this can include low to moderate income borrowers, individuals with bad credit or excessive debt, the elderly, and even minority families. If you find yourself in any one of these categories, stay especially cautious to make sure you are not a target of predatory lending.
6) Are You Being Given The Proper Disclosures?
Another sure warning sign of a predatory lender is if you are being given the proper disclosures or not. Depending on your specific mortgage transaction and state location, typical disclosures should at least include the Good Faith Estimate (GFE), Truth in Lending (TIL), and HUD-1 Settlement Statement. FHA loan requirements also include additional legal disclosures as well. In addition to these disclosures, the mortgage lender should go over each one with you and make sure you understand each document fully.
7) Blank Documents Are a Sure No-No
If a mortgage lender or broker insists you sign a blank document, run--and run fast. Under no circumstances should you ever need to sign a blank document during a legitimate mortgage transaction. On some documents such as the basic Uniform Residential Loan Application (Form 1003) there may be a blank page left over, or a page with blank space available. If you must sign such documents, insist that you cross out the blank area with an "X" marking across the space.
8) Does Your Interest Rate Seem Higher Than Normal?
If you have bad credit or other limiting factors, it may be normal to encounter "higher" interest rates. Some lenders will also issue higher rates to cover closing costs and commissions, but the premium should not be excessive. However, if you suspect your rate is abnormally higher than needs be, shop around and find out what's going on. In severe cases, predatory lenders can persuade borrowers into accepting rates two to three percent above wholesale in order to receive larger commissions. Shop around--it's the best way to protect yourself from overcharges.
9) A Substantial Benefit Must Be Established In Any Mortgage Transaction
Whether you're signing up for a new FHA mortgage or an adjustable rate mortgage, there must always be some benefit to the homeowner. Common benefits include lower interest rates, shorter terms, or a cash-out mortgage refinance. Whichever the case, lenders must establish this substantial benefit to the homeowner. It's no secret that refinancing costs homeowners money, and this warning sign is to avoid predatory lenders who are just looking to originate home loans for the sake of profit alone.
10) Be Honest With Yourself--Can You Afford This Much Mortgage?
Although some lenders have been accused of irresponsible lending recently, there are still two parties involved. One who issues the loan, and the other who chooses to accept that loan. And though the subprime lending market seemed to disappear overnight, some FHA loan requirements still invite borrowers with moderate incomes and small down payments. If a predatory lender offers you a mortgage you can't afford, you will need to acknowledge your own financial limitations--after all, you will be the one ultimately responsible for the home loan.
11) Do You Feel Cornered Into Making a Decision?
The mortgage process can be complicated at times, but you should never feel pressured into making a decision. Predatory lenders might pressure you with sales tactics or lines such as, "you're interest rate isn't locked forever", "you paid for an appraisal already", or "we've worked this far already". Especially at the final closing table, don't rush into a decision you're not comfortable making. For many mortgage transactions, you can also rely on your right to rescind within three business days.
12) Are The Closing Costs, Fees, and Commissions As Initially Agreed Upon?
Sudden surprises are a common tactic of predatory lenders, and one of the most common complaints from homeowners and borrowers. Although mortgage lenders are only required to give you an initial estimate, the final deal should not be significantly different. Additionally, typical loan fees can range anywhere from one to three percent, but some lenders will attempt to legally charge you upwards of five percent. Be wary of such lenders as they can attempt to disguise their fees and costs with complicated mortgage jargon. The best practice is to discuss these costs and fees beforehand, and then review each one again at closing.
And finally, the one thing that can't be measured or checked with the Better Business Bureau--your gut. If your gut says "no" then it probably has a good reason (unless you just scarfed a whole box of doughnuts or something silly). Listen and go with a lender you trust.
Heindrick So is a mortgage consultant at a local Bay Area Real Estate Brokerage--specializing in residential wholesale lending. Heindrick frequently contributes to various finance columns, ranging from home loans and mortgages, debt management, and other personal finance topics.