Clear Talk About Mortgages

15 Ways to Identify a Risky Mortgage Loan

1. Be Leery of Home Loans With An "Unheard Of" Low Rate
If your mortgage lender offers a super low rate of let's say 1.25%, the loan is an adjustable rate and this initial rate is certain to increase in the next couple of years. Because interest rates are unpredictable, accepting a low adjustable rate and purchasing a pricier home will mean much higher payments in the future.

2. Beware of "Option" Mortgage Loans
The majority of homebuyers want a loan that fits into their budget. If a borrower cannot afford a specific loan amount, the lender may recommend several loan alternatives, each designed to lower monthly payments and get the borrower qualified for the loan. These loans consist of interest-only mortgages or loans wherein a small percentage of interest is due each month. Because "option" loans can result in negative amortization, and a few feature adjustable rates, these are dangerous and lead to future payment increases.

3. Lenders Encourage You to Borrow Too Much Money
Some lenders actually encourage homebuyers to borrow large amounts. If you can't afford a particular mortgage payment, or you don’t feel comfortable accepting a loan term, walk away from the deal. Mortgage lenders don't always have your best interest in mind.

4. Lender Persuades You to Falsify Documents
To increase your probability of qualifying for your dream home, a shady lender will encourage falsifying information on the loan application. This can include lying about monthly income, liquid assets, debts, etc.

5. Don't Fall For "Too Good to be True" Offers
If a mortgage lender presents a deal that seems "too good to be true," make sure you carefully read the fine print. In many instances, there is an unfavorable loan term hidden in a clause or statement.

6. Asked to Sign a Blank Document
A reputable mortgage lender will never ask you to sign your name to a blank document. Don't fall for pressure tactics. Once you sign a blank document, the mortgage lender is free to change information, and you'll be held to the agreement.

7. You Don't Receive Necessary Disclosure Documents
By law, mortgage lenders must issue a Good Faith Estimate and other disclosure forms within three days of receipt of your loan application. If the lender doesn't provide the documents or "forgets to send the paperwork," proceed with caution.

8. Don't Agree to a Balloon Payment
Some loans feature a balloon payment, wherein the entire loan balance or a sizeable payment will be due within a few years. Homeowners always refinance the loan before the balloon payment is due and avoid the huge expense. However, mortgage refinances involve fees and closing costs, and there is no guarantee that you will get approved for the refi.

9. If The Loan Doesn't Close, The Lender Still Requires Payment of The Origination Fee
Never sign a contract agreement that binds you to pay the loan origination fee even if the deal falls through. This is a dishonest lender's way of trying to swindle money from potential borrowers.

10. If The Loan Terms Change at Closing, Don't Sign The Documents
Because borrowers are eager to complete the loan process and receive the keys to their new home, some lenders will change the loan terms at the last minute. If this happens to you, don't sign the loan papers. A higher interest rate could result in a higher mortgage payment, which may not fit into your budget.

11. Is There is a Pre-payment Penalty?
Several lenders charge borrowers a pre-payment penalty for the first two or three years of the loan. If the borrower sells the property within this time frame, they must pay the lender a fee or penalty. This fee is not required, and lender can waive it.

12. Don't Let the Lender Pressure You Into Making a Hasty Decision
A few mortgage lenders attempt to pressure borrowers by creating a false sense of urgency. They persuade borrowers to quickly accept a loan offer, and discourage shopping around. There is nothing wrong with getting multiple loan quotes before making a final decision.

13. Don't Agree to an Arbitration Clause
Signing an arbitration clause means you agree to settle disputes with the lender outside of a court. This is dangerous because the lender may use this as an invitation to take advantage of you.

14. Lender Fails to Answer Your Questions
Shady lenders prefer buyers who are unfamiliar with how loans work. This way, they can offer them a super high rate, bad loan terms, and profit from their lack of knowledge. If you are unsure about an aspect of the loan, ask questions and conduct your own research.

15. Get Everything in Writing
The mortgage lender can make several promises. However, if the promises are not put in writing, they are not obligated to uphold their end. If you ask for a lock loan agreement, float down option, etc; make sure all verbal agreements are negotiated into the loan deal.