This article is a consumer’s guide to avoiding a predatory mortgage and getting the best mortgage available. Home purchasers and homeowners may want to keep this article as a checklist for every phase of the lending process, from the application to the closing and beyond.
1. Prepare for the Loan Application
Check your credit report and correct any mistakes
Interest rates depend in part on your credit rating, also known as your FICO score. Your FICO score comes from your credit history and a credit report by Experian, Trans Union, and Equifax. You should know what your credit report says about you. You can get a free copy of your report once a year and again any time that you are denied credit. The three credit reporting agencies may be contacted through their Web site (see links following article).
Check your credit reports for mistakes and dispute any mistakes, in writing, to the credit reporting companies. They must remove inaccurate information. Once the credit report has been corrected, your credit score may improve and you may be able to qualify for a loan with a lower interest rate.
What is predatory lending?
All lenders try to get the best return on the money they loan. Predatory lenders go too far by targeting low-income and unsophisticated borrowers for loans with unfavorable terms. Predatory lenders offer high interest rates and high-cost loans to borrowers who should qualify for loans with better terms.
Shop around for the lowest interest rate
Shop around for a lender that will give you the best interest rate available, especially if your credit is not great. The best way to find out what interest rates are available is to call a number of lenders and ask. You can also get an idea of what the interest rate should be by visiting the New Jersey Department of Banking and Insurance Web site. Click on the Consumers icon. Under Personal Finance, click on “What Interest Rate Should I Pay?” for a chart that will list mortgage interest rates according to credit scores. (You can also go directly to the chart.) The information will be a few days old, but it is a place to start. If one lender will not give you the mortgage you want, maybe another lender will.
Avoid one-stop lenders
It may seem like a good idea to go with a lender who makes everything easy. But sometimes getting a mortgage is too easy. If you don’t have to do anything but sit in your living room and sign papers, beware. The lender does not care if you cannot afford the loan. The lender gets the fees from the closing and will get your home in a foreclosure if you cannot afford the mortgage.
Avoid mortgage brokers
You do not need a broker to help you get credit. A mortgage broker will just increase the cost of your loan.
2. At Closing
Even if you are already paying for an attorney at the closing, that attorney may be representing the interests of the lender or the title company, not yours. It is always a good idea to be represented by your own attorney, even if you are just refinancing your mortgage. Usually the cost for legal representation is a few hundred dollars, which is minimal when you consider how large the transaction is, its impact on your life (especially if something were to go wrong), and the benefits of legal representation.
Make certain that the loan is affordable
When you take out a mortgage loan, you must be certain that you can afford the monthly payments, along with the insurance, property taxes, and all your other monthly expenses. A good rule of thumb is that the monthly loan payments should not exceed 28% of your gross monthly income. Be certain that you know whether the monthly mortgage payment includes property taxes and insurance. If you are refinancing, a lender will compare your current mortgage payment with a new mortgage payment. Predatory lenders sometimes make a mortgage look affordable or better than your current mortgage by taking the property taxes and the insurance out of the monthly payment and then comparing it to your current mortgage payment with taxes and insurance included.
Read all of the closing documents
Read all of the documents before signing anything. You may have difficulty understanding them. Reading the documents is the only way to be certain that you are agreeing to the mortgage you want. Ask questions and get changes made to the documents. If you have any doubts, do not sign anything unless and until the documents state your understanding of the mortgage. Beware if the lender hurries you or shuffles papers so that you cannot see them.
Beware of promises
If the lender tells you one thing and the documents say something else, don’t sign anything. It may be inconvenient not to sign, but don’t be a victim. What you sign is what you get. If the lender says you have a 7.5% interest rate for now, and after you pay on time for a year the lender will get you a lower rate, don’t sign anything. The future refinance will have costs and fees. Also, a statement is not a guarantee that the lender will actually make the future refinance. Only trust promises if they are in writing and signed by the lender.
Beware of any lender who hurries you. You can always change your mind, even at closing. Do not feel pressured by lenders. Most closing fees and costs are refundable. If you do not know which fees are refundable, check the lock-in agreement, the application, and the commitment. Do not let the lender pressure you into signing any documents.
Avoid signing any documents with blanks
A sure sign that you are dealing with a predatory lender is that the lender wants you to sign a loan document that contains blanks. Blanks can be altered after you sign the document so that the responsibilities under the mortgage change without your acceptance or understanding of the terms. Don’t let this happen to you. If there are any blanks in a document, do not sign it until it is completely filled in and you understand and agree to the terms.
Avoid balloon payments
A balloon payment is a large payment that is due at the end of the loan. For instance, you get a 15-year mortgage and receive $40,000. You pay $200 per month in mortgage payments for 15 years, then you must pay $38,000 at the end or be in default. These loans are also referred to as “negatively amortizing” loans. A balloon payment results when the monthly payment charged by the lender does not cover the cost of the principal and the interest on the mortgage. This loan is only appropriate if you choose it for financial reasons. For example, you cannot afford a higher payment at this time, you believe that interest rates are going down, and your financial situation is about to improve. This type of loan requires you to refinance or sell at or before the end of the loan. It is especially risky because you cannot predict what your financial condition or your credit score will be at the end of the loan term.
Avoid mandatory arbitration clauses
An arbitration clause requires you to give up your right to go to court if you have a dispute with your lender. Usually, this clause is one-sided. The borrower must give up the right to a trial while the lender keeps its right to go to court. Arbitration may be expensive and unfair because one or both of the parties has to pay the arbitrator for his time. Also, the arbitrator’s decision usually cannot be appealed. If the loan documents contain an arbitration clause, don’t sign anything, and look for another lender.
Costs and fees
- Avoid mortgage broker fees. Often a lender will increase the closing fees or the interest rate of the loan by adding a mortgage broker fee to the loan. You may have had no contact with a mortgage broker. If you found the lender yourself, don’t pay a mortgage broker fee or a yield spread premium. A yield spread premium, or YSP, is a hidden broker’s fee which increases the interest rate.
- Beware of certain types of mandatory insurance. The lender should not require you to purchase credit insurance, credit life insurance or credit disability insurance. If your lender says that these types of insurance are required, do not get a mortgage through that lender. If you find out about this insurance for the first time at the closing, do not sign anything and do not continue with the closing.
- Beware of high-cost mortgages. Mortgages can be costly. However, the points and fees the lender charges may be too high. If the points and fees on a refinance total 8% or more of the amount financed, then the loan may be a high-cost mortgage. Try to avoid it. Lenders are paid with the fees and interest from your loan. The higher the fees, the more the lender gets paid. The lender does not have your interests in mind.
If you do end up with a high-cost mortgage, the lender must give you additional written warnings and a written notice of your three-day right to cancel the mortgage. The right to cancel sometimes extends to three years. If you would like to cancel your mortgage, talk to an attorney immediately to see if you still have a right to cancel the mortgage.
- Avoid prepayment penalties. Prepayment penalties are fees imposed for paying off a loan early. If you pay off a 30-year loan in three years, you have prepaid the loan. The lender then charges a penalty for the early payment. Try to avoid loans with prepayment penalties. Generally, they are only offered to people with bad credit. Prepayment penalties are predatory because they can trap you into a bad loan. You never know when you may need to sell or refinance your home. Predatory lenders also use prepayment penalties to force you to refinance with them.
3. After Closing
Right to cancel mortgage refinances
Consumers have the right to cancel, or “rescind,” a refinance of their home mortgage within three business days of the closing, or the date that they received the copy of the notice of the right to cancel. Therefore, if you think you made a mistake with a mortgage refinance, you may cancel it within three days if you give proper notice in writing to the lender. If the lender never gave you the proper written notice of the right to rescind, your right to cancel continues for three years. If you think you may have been a victim of predatory lending, you should contact an attorney immediately to see if you still have the right to cancel your mortgage.
Home improvement contracts with mortgages
Beware of door-to-door home repair contractors who offer mortgages to finance the repairs. If your home needs repairs, you should shop separately for the best home repair contractor and the best mortgage or line of credit available. A home repair contract must be in writing, and it must meet the requirements of New Jersey law. Make sure that your home repair contractor is qualified. You may want to check with the N.J. Department of Consumer Affairs at 973-504-6200 to see if there are any complaints against the contractor. Check references. Make certain that the contractor has obtained all proper building permits before work begins. Do not pay the contractor in full until all of the work has been completed to your satisfaction. Do not sign a certificate of completion until you are satisfied with all of the repairs. If you have entered into a home repair contract, with or without a mortgage, and you are not satisfied with the home repair, you should contact an attorney immediately. You may have the right to cancel the contract and/or the mortgage.
Retain all documents
Keep all of your loan documents and home repair contracts in a safe place. Keep all of your cancelled checks or money order receipts as proof of payment. Make certain that you are able to refer to these documents in the event that there is a dispute between you and the lender or servicer.
The servicer accepts your mortgage payments. If you have a dispute with the servicer or lender, you should write down the subject of the conversation, the date, time, and name of the person with whom you spoke. If the problem persists, follow up with a detailed letter sent certified mail, return receipt requested. Keep copies of all correspondence and the proof of service on the servicer. If the problem continues, you should consider getting an attorney.
Even with this guide, a predatory loan is not always easy to recognize. New scams develop every day, and there is no sure way to avoid all forms of predatory lending. If you suspect that you have become the victim of a predatory lender, you should have an attorney review the loan documents, payment history, and circumstances surrounding the loan advertisement and the loan closing. An attorney review is especially important if you are facing a default or a foreclosure, because predatory lending claims may be raised as a defense to a foreclosure. If you suspect that you have been a victim of predatory lending and have a low income, call LSNJ-LAW™, Legal Services of New Jersey’s statewide toll-free legal hotline, at 1-888-LSNJ-LAW (1-888-576-5529) to see if you are eligible for assistance.
This article originally appeared in the May 2004 edition of Looking Out for Your Legal Rights®.