By Judy Rose
Knight Ridder Newspapers
(KRT)
You've heard a lot about recent laws to protect homeowners from the predatory mortgages that strip some people of their biggest asset - the equity in their house.
Well, don't count on the lawmakers to protect you. Despite all the talk, consumer groups have won darn few battles in this fight.
Now the U.S. Congress will take up a similar bill sponsored by Rep. Bob Ney, R-Ohio. It would prohibit all states and cities from passing laws to restrict lending practices. Like many such bills, it's being called a consumer protection bill. But critics like ACORN (Association of Community Organizations for Reform Now), the national advocacy group for low- and moderate-income families, say it has been written to benefit subprime lenders.
The hard-core message of the past few months is twofold:
You cannot rely on current laws to protect you from predatory lenders. The majority of the high costs are legal.
It has never been more important for regular people to learn how to stay clear of a ruinous loan - one that eats up your home equity with huge fees and interest rates.
There are many reputable lenders who will give you a mortgage and take only a reasonable profit. How do you tell the difference?
Here's what we hope is the most complete guide yet to protecting yourself when you shop for a mortgage.
1. Shop around. You can be a smart mortgage shopper even if you have damaged credit. Don't assume you have to take what the first lender offers you.
2. As you shop, remember that the cost of a mortgage has three parts - interest rate, points and fees. You don't know the cost of your loan until the lender tells you all three.
3. Points, the up-front fee paid to the lender, are becoming uncommon. One point is 1 percent of the loan, or $1,000 on a $100,000 mortgage. Paying points should be a voluntary move to lower your interest rate. But predatory mortgages may charge up to 8 points. On a $100,000 mortgage, that's $8,000 off the top as profit to the lender. You should not pay points if you're not getting a better-than-standard interest rate. By the way, few lenders use the word point. Most call it a loan discount fee.
4. Fees - what a quagmire. Some, like the appraisal fee, are necessary. Some, like a $300 underwriting fee, are a fair return to the mortgage company. Some are junk fees meant to pile on the profits. They have names like origination fee, discount fee (points), settlement fee, processing fee, fax fee and more. With OK credit and a reputable lender, mortgage fees should total $1,200-$1,400. For a loan with damaged credit, $1,800-$2,000 might be fair. If the total is much higher, something's wrong.
5. Don't assume that lenders who advertise aggressively are all OK. Some are; some aren't.
6. Pull your own credit report before you shop through one of the credit services, such as Equifax (800-685-1111), Experian (888-397-3742) or TransUnion (800-888-4213). "That credit report sets the tone for your interest and fee negotiations," said Valerie Johnson, executive director of the Detroit Alliance for Fair Banking.
7. As you shop, don't give lenders your Social Security number and let them pull a credit report, Johnson said. Multiple inquiries lower your credit score. Have your own report in hand, she said. "When they say, `Give me your Social Security number, so I can pull a report,' you say: `Bam. Here it is.'''
8. After you select a lender and fill out an application, your lender has to give you a good-faith estimate of your mortgage costs. Scan this for your first tip-off of trouble. Look for a percentage called APR, or annual percentage rate. This will be higher than the interest rate you've been quoted because it combines the cost of both interest and fees. But it shouldn't be too much higher. For example, it's reasonable if you've been quoted interest of 6.5 percent that your APR is 7.5 percent. But if the APR is 3 percentage points or more over interest you've been quoted, that signals excessive fees. (The law right now allows APR to be 8 percentage points over the quoted interest.)
9. Even so, don't be lulled by the good-faith estimate. It's not binding on the lender, who may lowball some parts of the estimate. "Remember, what they tell you up front more than likely won't be what you close at," Johnson said.
10. Do not wait until you get to the closing table to see your final papers. Far ahead of time, then several times more while your mortgage is being processed, tell your lender you have to see what's called the attorney's package - a copy of the closing documents - 24 hours before the loan closes.
11. If the lender says the package won't be ready until the closing, postpone the closing and give the lender another day or two, said Johnson. You have to do this in advance, not at last minute. If you cancel at the last minute, there can be a fee for redoing the package with a new date.
12. If the deal is much different from what you were offered, don't close. This can be tough because the lender is holding your application fee, about $300. But don't accept the explanation, "Sure, it's high now, but you can refinance out of it in a year." That's rarely true.
Finally, for people who believe they have damaged credit:
13. First, make sure you really do. Pull your own records. It's a common ploy of unethical lenders to tell borrowers their credit is worse than it is.
14. Remember you do have options. Reputable lenders have loans for your situation.
15. Start shopping long before your situation is desperate. Leave yourself the time to find a good lender and get your best deal.
16. If you are refinancing your home to pay off other bills, don't stop paying those bills, even if the lender tells you to. Some lenders create a false emergency by stalling the mortgage until all the client's bills are late. Afraid of foreclosure, the client takes a bad deal when it's offered.
17. Don't be too quick to refinance as a way to solve financial problems. The ads make it sound great - cheap interest rates and a tax deduction. But you won't get that great deal if you're already in trouble. You're more likely to get a deal that will put you several thousand dollars deeper in the hole and make you less likely ever to escape.
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© 2003, Detroit Free Press.
Distributed by Knight Ridder/Tribune Information Services.
