to avoid last-minute closing costs
In the mortgage
business, a promise is just a promise, not a guarantee.
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."
So what can
consumers do to protect themselves from changes in their loan rates, points and
parameters between application and closing?
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.
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.
that can cause problems:
- having only a
few months on the same job or in the same line of work,
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
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.
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.
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.
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.
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.
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.'"
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.
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.
best advice is just for the consumer to make sure he understands what the commitment
or lock in agreement says."
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
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.
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.
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.
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.
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.