Loan Officer Scams & Tricks
There are many problems with the mortgage industry, most are caused
because loan officers know far more than the average borrower.
Knowledge is your best defense against these mortgage scams and tricks.
Bait & Switch
This game is played by many industries including the mortgage
industry. In the auto industry, they advertise a sports car in the
paper but when you show up it suddenly turns into a Yugo.
Well lenders play the same game just a little differently; they
advertise much lower rates than everyone else. It becomes a simple
game of numbers to them. They get 1000 people to call, 200 people
to come into the office and 50-100 loans are completed and in reality if
only 5 loans were made I'm sure that would cover their advertising cost.
This is a very profitable choice for some loan officers, no matter what
they have to say or do.
Best way to avoid - Avoid any ads that are quoting interest
rates 1/2 of a percent or more below the average interest rate.
They say your interest rate is locked, but did they
lock it?
A large percentage of loan officers like to tell you "oh of course I
locked your loan", but in reality they choose to play the game and don't
lock it. Many of these loan officers are not trying to cheat you;
they're just rolling the dice on their profit margins.
If they tell you it's locked and then choose to let the interest rate
float, they are hoping the interest rate will move down further before
the loan closes. This improves their profit on the loan without
costing you any additional upfront cost. The lender ends up having
to pay them a bigger
YSP on the
backend of the loan.
If the interest rate goes up, it usually does not move so fast that a
loan officer would not be able to lock the loan before his profit was
erased. There are times when they can not lock it fast enough.
They will then either pass the cost onto the borrower with some story as
to why their rate was not locked or, (if they're worth a darn) they'll
simply eat the difference and hope to make it back on a future loan.
Best way to avoid - Have the loan officer give you a copy of
the rate lock sheet provided to him by the lender, also have him sign
and date it for you. If he refuses, or says he's not allowed to do
that, hit the door and find a new loan officer/broker.
No-Cost Loans that cost you plenty
You have "no-cost" loans, and you have "no-upfront-cost" loans.
A true "no-cost" loan will have an APR equal to the interest rate.
A "no-upfront-cost" loan will bury the fees in the loan, having an APR
which is significantly higher than the interest rate. There are
loan officers that don't know the difference then there are others that
know, but try to cheat you anyway.
Best way to avoid - Check the Annual Percentage Rate
Not disclosing a prepayment penalty
This is one of the worst tricks a loan officer can use. By not
disclosing the prepayment to the borrower the loan officer is getting a
much larger
yield spread premium
then he would without it. Most borrowers will not find this out
for perhaps years. Then it will end up costing you thousands or
tens of thousands to get out of the prepayment fee.
Best ways to avoid - Always ask your loan officer if
the loan has a prepayment penalty and have him show you in the documents
(i.e. good faith estimate, truth in lending or other disclosure).
You also need to ask the title officer or notary when you sign the final
documents during closing.