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Tips to avoid last-minute closing costs

In the mortgage business, a promise is just a promise, not a guarantee.

Brokers and lenders can tell you anything they want -- and even put it in writing -- then turn around and say, "Oh well, things changed. You owe 9 percent interest instead of 7 percent."

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So what can consumers do to protect themselves from changes in their loan rates, points and parameters between application and closing?

Follow these steps and tips. Experts don't guarantee they'll protect you from lender malfeasance and common consumer mistakes (just like "rate lock" agreements don't actually guarantee rates. Go figure.), but they should help you avoid most changes or minimize their impact.

1. Tell your lender about all the weird conditions you meet when you apply for your loan. Sometimes what you put on the application doesn't tell the whole story. You may get a "conditional approval" based on a cursory credit check and review of your application data. But when the lender starts underwriting, or investigating, your loan, anything odd that you didn't mention up front could lead to changes in your loan terms.

If you're buying a condominium, for instance, and the lender finds out through the underwriting process that most of the units in the building are rentals rather than owner-occupied condos, you could end up having to pay more for your loan.

Other things that can cause problems:

  • having only a few months on the same job or in the same line of work,
  • being self-employed and not having a long job history nor willing to share tax returns,
  • buying a new condo in the first phase of, say, a four-phase construction project,
  • living in an area that wasn't in a flood zone when you bought the property but is now due to government map revisions.

2. Don't misrepresent your credit, income or property value. While revealing credit blemishes can be embarrassing, it's the only way to ensure you get an accurate price quote. Your lender may not find something in the initial credit check because that check may be less thorough than a secondary check that comes later.

But chances are, those late credit card payments or that past bankruptcy will be discovered. Rather than have your loan price adjust a week or two before closing because of that, why not just share all your information now and get an accurate price to begin with?

The same holds true for income and property value. The lender is going to check with your employer to find out if you make what you say you do. If there's a big discrepancy, your debt-to-income ratio could be higher than initially thought and your loan price may be adjusted to reflect that.

If you're refinancing, don't assume that because you put in new kitchen cabinets and a pool, your home is now worth $50,000 more than what you paid for it originally.

Many loan programs depend on the loan-to-value ratio you will have after the loan closes. If the new appraisal the lender orders shows that those improvements only boosted your property's value by a few thousand dollars and you want to take several thousand dollars in cash out of your home by refinancing, you could be in trouble. The lender may not make the loan or may offer you less money, a higher rate or some combination thereof.

"Sometimes people hear (the initial approval) as positively as they want it to be, meaning it's a done deal. But sometimes we do discover things in the process," says Christine Lucien, senior vice president and national operations manager at the mortgage division of Cleveland-based KeyCorp.

"Up front, we basically have to rely 99 percent on what the customer is giving us. On most applications these days, with consolidations, etc., they're done over the phone," she says. "There are always the potential for surprises that the customer forgot to mention and those can change the kind of program" they get.

3. Find out how long your rate lock is good for and whether it will definitely extend long enough to get you through closing. One of the main reasons people end up paying more for their loans is that they don't lock in their rates for a long enough period.

In a busy lending market, appraisers, title companies, underwriting departments and other people who help move loans toward closing get backed up. Someone who gets a rate lock that only lasts 15 days or 30 days may not be able to close in that amount of time. That person then has to re-lock loan rates just before closing at whatever current market rates are. If they're higher, the borrower ends up paying more.

"My recommendation to any borrower is: when you are quoted a rate, you need to get something in writing from a lender indicating whether that rate is floating until you lock in or whether that rate has been locked in for closing," says Peter Weiss, a Brentwood, Tenn. real estate attorney. "If a lender says, 'We're too busy' or 'I can't,' then I'd say, 'I'm sorry, I'm going somewhere else.'"

It's important to keep in mind that a rate lock agreement does NOT unconditionally guarantee your terms. If you didn't follow tips one and two, you could end up paying a higher rate or more points than shown on your agreement. The lender or broker would justify the change by saying you overstated your income, your house isn't worth what you said it was, etc. and would be completely within his bounds because rate lock agreements have fine print caveats in them.

"There should be a clear understanding by everybody as to what they are," says Bud Carter, senior director of residential finance at the Mortgage Bankers Association of America in Washington. "Hopefully, most lenders don't use any misleading terms or identify them in some misleading way, but I think sometimes, what enters into it is there is a lot of competition for loans. There is a lot of business out there being done and some people are being rushed through.

"The best advice is just for the consumer to make sure he understands what the commitment or lock in agreement says."

4. Keep paying on your old loan until you close on the new one. A lender or broker may tell you that once you apply for your new loan, you can stop paying on the old one. That is wrong! If you don't keep current on the old loan, the old lender may start reporting you to the credit bureaus as being late on your payments.

If it takes a long time to close, you could end up with a 30-day or 60-day late payment blemish on your record. The new lender could then turn around and use that as justification to change your loan program or boost your rate.

5. Question discrepancies between your initial "good faith estimate" and your "HUD-1 settlement statement." Federal law requires lenders to provide a good faith estimate, or GFE, statement to consumers within three days of when they apply for loans. The document is an estimate of what closing costs the borrower will have to pay. The HUD-1 statement is the document that shows the actual costs. Lenders don't have to provide that until either closing day or the day before.

While there's no penalty for understating costs on the GFE, reputable lenders and brokers will try to give people an accurate assessment of their final bill. Borrowers who see a big difference between the costs listed on their GFEs and those listed on their HUD-1 forms shouldn't be afraid to ask why that happened and be suspicious of wishy-washy answers.

6. Be extremely skeptical of any changes in terms after you get your "letter of commitment." Lenders often give borrowers "conditional approvals" after an initial application review and credit check. But terms presented on those forms can change as a result of what we discussed in tips one and two. Much closer to closing day, lenders provide borrowers with written "letters of commitment" that spell out terms that should be much more accurate. That's because most of the underwriting steps and other pre-closing activities are complete at that point. If your lender tries to change things between the issuance of that letter and closing day, something may very well be wrong.

7. Don't spend every last penny on a home or loan. This is good advice no matter what, but it can also protect you from unforeseen changes in your loan terms. There are legitimate reasons why you may have to come up with several hundred or a couple thousand extra dollars in fees or points to close. If you don't have that kind of money sitting around, you could lose the home you're trying to buy.

8. Don't be afraid to walk away. Above all else, remember that statement. Sure, you might lose what you think is the perfect house. But if you agree to pay an artificially inflated interest rate or thousands more in points for a mortgage, your finances will suffer greatly. On a $200,000, 30-year mortgage, a one-half of a percentage point increase in the interest rate to 7.75 percent from 7.25 percent boosts the monthly payment by $68 to $1433. The overall interest bill rises by almost $25,000 to $315,817. That's some expensive linoleum.

If you took all these steps and feel you were ripped off anyway, experts say you may be able to sue in civil court to recover any overcharges. But the cost of litigation could easily exceed the amount of any judgment. And remember, rate lock agreements, conditional approvals and the like do not guarantee that you'll receive those terms! If a lender discovers things during the underwriting process that you didn't mention up front or that weren't apparent initially, your terms can be changed.

That said, experts recommend you complain to anyone who will listen. Your state's attorney general and mortgage banking or broker regulator are good places to start. If you got your loan from a federally chartered or regulated bank, credit union or thrift, you can get information about who to complain to at this site run by the Office of the Comptroller of the Currency.

These agencies may be willing to contact your lending institution or investigate on your behalf. Sometimes a phone call or letter from someone "official" will be enough to prompt your lender to refund some of your money or agree to modify your loan.

On refinance loans, borrowers do have a three day right of rescission. If they decide after closing that something doesn't look right in their loan documents, they can say they don't want their loans after all and get their money back. Borrowers should receive a decision request form that can be sent to the lender (ideally, mail it with proof of the day sent). Lenders then get 20 days to refund their customers' money.

 

 
-- Updated: Nov. 13, 2002
   

 

 
 

 

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