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Watch out for bad-loan signals

Johnny Bell had a new deck and other home improvements in mind when he refinanced his home in Oxford, Miss., last summer.

Make that almost refinanced.

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Bell spotted attractive terms on a television ad, contacted the lender and locked in a cash-out refi at 5.125 percent with $350 upfront as a processing fee toward a 45-day closing.

Then trouble began. First, the company delayed the closing, saying it was behind on the paperwork. Then it asked for proof of reserve funds and Bell complied. After 90 days, the company informed Bell that his "locked" rate had gone up to 6.2 percent.

"I got angry," Bell recalls. "I told them I was definitely not paying more interest. They started making excuses for why it had taken so long, putting the blame on Fannie Mae for requiring the reserves. But the interest rate didn't have anything to do with the reserves."

After two more months of futile telephone calls, Bell walked away from the deal, received his $350 back and built his deck out of pocket.

"It was bait and switch," he said. "It took me five months to not refinance."

Signs of a bad loan
Bell's experience isn't isolated. For the last couple of years, low interest rates, aggressive marketing tactics, scant industry oversight and investors who want to put their money into real estate instead of the stock market have contributed to the ideal operating environment for predatory lenders.

In many cases, it's all too easy for a trusting homeowner anxious to leverage a home's value or lock up a low rate to fall prey to less-than-upfront lenders. W.C. Fields maintained that you can't cheat an honest man. But when it seems that everyone is getting a loan and you've been promised rock-bottom interest rates and negligible fees, it's hard to resist.

Some deals, however, are indeed too good to be true.

According to the Federal Trade Commission, you may be signing on for trouble if a lender:

  • Encourages you to falsify your application information to get the loan.
  • Urges you to borrow more than you need.
  • Pushes you to accept payment terms that you can't realistically meet.
  • Fails to give you the required disclosures (e.g., APR, rescission rights, etc.).
  • Shows up at closing with a totally different loan product than you agreed to.
  • Asks you to sign blank forms. ("It'll speed things up. We'll fill in the blanks later, trust me.")
  • Denies you copies of documents you signed.

And if you miss a warning sign early in the process, a bad loan often resembles the Tar Baby from the Uncle Remus story: The further in you get, the harder it can be to get out. Bad lenders are counting on the likelihood that the farther you travel down the loan-process road, the more you will have invested in earnest money, deposits, inspection fees, design plans and contingencies that accelerate your momentum to close.

 
 
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