Protect Yourself Against Shady Home Loan Practices, Mortgage Brokers

Brian Diez, a former military man, entered the mortgage business after a career as a stockbroker, figuring the field industry offer him an altruistic benefit - helping families buy their first homes.

As Marketwatch reports, though, he learned quickly that not every one of his fellow brokers had their clients’ best interests at heart.

“What became clear to me is every [home mortgage company] was really interested in selling as many loans as they can, and not really helping clients,” said Diez, sales manager for First Class Equities in Oceanside, N.Y.

The dirty tricks he has seen and heard of range from brokers steering clients into products clearly unsuited for them to shady switcheroos at the closing table.

Consumers can at least protect themselves by doing research online before talking to a mortgage broker or banker, in order to have an idea of their mortgage options before they’re ever presented, Diez said.

They should also request copies of and review their credit reports to know what their credit looks like before the discussion begins.

Unfortunately, you may never find a truly altruistic mortgage lender: It’s rare when commission-earning individuals - whether the product is a mortgage, stocks or an automobile - can completely divorce their self interests from a sale, said Joseph Badal, senior executive vice president at Santa Fe, N.M.-based Thornburg Mortgage.

But there are ways you can shop more wisely for a mortgage. Don’t get fooled by sales people who are more concerned about commissions than clients. Heed these tips:

• Beware of products that seem too good to be true

Watch out for low-payment advertisements, said Kate Crawford, chairwoman for the consumer protection committee of the National Association of Mortgage Brokers.

“What it is, it’s a teaser ad … that could lead to negative amortization,” she said.

In a negative amortizing loan, borrowers aren’t paying the full amount of interest accrued each month and the unpaid amount gets added to the principal, thus increasing the balance.

Homeowners with this type of loan can find themselves owing more than they bought the house for - a scenario especially important to remember in a softening housing market.

Although certain exotic home loans make sense for some borrowers, they’re not for everyone, Badal said. To find the best rates and terms, compare estimates from a few lenders.

• Ask about prepayment penalties

Mortgages with prepayment penalties are those which charge a borrower fees for paying off the entire mortgage or a large portion of the principal during a certain period of time. Penalties can also apply should the borrower choose to refinance.

Terms of the penalties can be found in the Truth in Lending statement given to borrowers. But if the loan has a penalty for prepayment, it may be best to keep shopping, Diez advised.

“There are so many out there that don’t have them,” he said. “There’s no need to put a client into a mortgage that has a prepayment penalty.”

• Don’t cave to pressure - and protect your identity

If terms change at the closing table, don’t sign the contract, Crawford said.

“A borrower can walk away at any time. That’s their right,” she said. And never sign a contract stating an origination fee must be paid if the loan isn’t closed.”

She also recommends following common-sense measures: Don’t ever sign a blank form; get a copy of every paper that is signed. Don’t give out a Social Security number before it’s time to actually apply. For paperwork that is required by the lender, make a copy and always keep the original.

And while at your lender’s office, take a glance around to see how paperwork is handled - it may be one indication of how careful a company is with sensitive information, Crawford said.