Every other year we take a class called "Predatory Lending". What is taught are the new scams that a small percentage of lenders have come up with to get more of your money. Below are some common sense questions for you to ask any lender that you are considering using and some insight on how the lending business works.
We have seen situations where a buyer has been very successful in negotiating a more favorable price and then turn around and lose thousands by making poor decisions on who to use for their financing.
Rule # 1. If it sounds too good to be true it probably is. There will always be a catch. (Such as the 1% loans you hear advertised are 1% for 1 month.)
Rule # 2. Always get a written "Good Faith Estimate". Lenders are required to provide a "Good Faith Estimate" on any quote that they make to you, but not all do. This shows what they estimate the total closing cost to be and it will also show the Adjusted Percentage Rate (APR). Analyze these numbers carefully. They are very important and should be a major resource for your decision on who to borrow from. If they can't provide this quickly or it's not completely filled out, ask questions. If you don't get good answers, go elsewhere.
Rule # 3. Ask if your lender will guarantee that the closing costs they have quoted will not be + or - more than $200.00 from the actual costs. Predatory Lenders often quote low or very favorable closing costs. Picture this scenario: It is Thursday and you are at the escrow company to sign you final loan papers. You have rented your moving truck and have friends coming over on Saturday to help you move. The seller has also made similar arrangements and they need you to close in order to complete their purchase. When you are reviewing your final papers you find out that you need to come up with hundreds and in some cases thousands more in order to close. You are now in a state of panic and call your lender. You get a feeble excuse about the "Good Faith Estimate" being only that an estimate or that the actual costs could not be know until the loan was finished and sent to escrow. You know that if you try to change the closing date you stand a good chance of loosing the home you are trying to buy so what choice do have but to accept the higher charges.
Rule # 4. The only charges that may vary are the pre-paid's. They are subject to the amount of reserves that the holder of the note requires, and who you choose for homeowners insurance, and the correct property tax for the home you are buying.
Rule # 5. Never! Never! Never! Pay discount points. If you pay a discount point you are not getting a discount you are just prepaying your interest. It is an ego driven profit center for lenders. As a buyer we all want to say that we have a loan at 5% instead of 5.25%. Consider this first before you "buy down the loan". If you sell or refinance the home any money that you used to "buy down the loan" will be lost. In almost all cases if you just applied the amount of money that you were willing to commit to "buying down the loan"" you will reduce your payment by close to the same amount and the value will always remain in the equity of the home.
Rule # 6. Ask if the underwriting is locally done. If you use an out of state lender or a lender that has out of state underwriting don't be surprised if you get a call that the lender needs more time to complete the loan. This is a call that usually comes in when it is just a day or two away from the closing date. This may not seem like a big deal with just a day or two delay, but it is. Most moves are set for Saturday or Sunday and if the loan does not fund the seller can't complete their purchase. Which means that the move will have to wait now until it funds and if the funding happens on the following Tuesday instead of Friday you will probably lose a lot of your volunteers and there is also the possibility that the truck will not be available.
Rule # 7. Ask how long the review time is between signing and funding. The majority are 24 hours but sometimes and often if you use a lender with out of state underwriting it can be as much as 72 hours.
Rule # 8. Make sure that there is no prepayment penalty on any portion of the loan. Although sometimes a sub-prime lender may require it if your credit scores are to low.
Rule # 9. We are now hearing about lenders who have no closing fee's and may also be offering less than the going interest rate for loans. See Rule #1.
How the lending business works. The majority of Lenders earn their money by making the loans. They earn what is called a "loan origination fee" which is usually around 1% of the loan amount. That is it. Most lenders other than banks commit to buy a block of money that they lend out, then they turn around and sell the notes and let someone else service them. So if the going interest rate for loans is at 6.25 % and that is the yield that the investors can expect to receive then why would any investor buy a loan with a yield of less than that? It just doesn't make sense. A company could only sell those loans if they could increase the yield through higher closing cost etc. Now consider the lender that offers "no closing cost", a "better than market interest rate", and doesn't service its loans or make portfolio loans it just has no visible means of profit and wouldn't be solvent for very long. So something else must be going on for them to be in business.
Rule # 10. Use of Leverage- If you go to a lender of your choice you represent on average 1 loan every 7-10 years. On the other hand for the lenders that we recommend we represent 20-40 loans per year. The lenders have a lot more at stake and will do things to please our clients that they might not consider for just an average buyer. Our reputation is on the line when we recommend someone to provide any type of service and especially lending.
PS. Don't buy anything while you are searching for a home. The purchase of a new car or furniture etc. may have an adverse affect on your credit scores. Even opening a new credit card account will affect it. We once had a client buy a set of living room furniture that they paid cash for. Before the lender closed the loan they ran an additional check to see if the buyer had sufficient cash reserves in their bank account. We had to get very creative in order to still close on time.
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