Consumer Issues
Predatory Lending
If you are considering buying or refinancing a home, you'll want to make sure you are working with a reputable lender. Keep in mind that not all loans and lenders are the same. It is your right to shop around. The cost of doing business with high-cost lenders can be excessive and, sometimes, downright abusive. For example, certain lenders, often called "predatory lenders", target homeowners who have low incomes or credit problems or who are elderly by deceiving them about loan terms or giving them loans they cannot afford to repay.
Borrowing from an unscrupulous lender, especially one who offers you a high-cost loan using your home as security, is risky business. You could lose your home and your money. Before you sign on the line, think about your options, do your homework, and think twice before you sign. You have rights under the law.
Comparison shop
Contact several lenders. Ask friends and family for recommendations of lenders. Talk with banks, savings and loans, credit unions, mortgage brokers, and other lenders.
Comparing loan plans can help you get a better deal. Whether you begin your shopping by reading ads in your local newspapers, searching on the Internet, or looking in the phonebook, ask lenders to explain the best loan plans they have for you. Beware of loan terms and conditions that may mean higher costs for you. Get answers to these questions:
- Interest Rate and Payments -
- What is the monthly payment? Ask yourself if you can comfortably afford the figure.
- What is the annual percentage rate (APR) on the loan? (The APR is the cost of credit expressed as a yearly rate. You can use the APR to compare loans from different lenders or different loan products from the same lender.)
- Will the interest rate change during the life of the loan? If so, when, how often, and by how much?
- Term -
- How many years will you have to repay the loan?
- Is there a balloon payment? (A large single payment at the end of the loan term. When the balloon payment is due, you must pay the entire amount.)
- Points and Fees -
- What will you have to pay in points and fees? (One point equals 1 percent of the loan amount; 1 point on a $100,000 loan is $1,000.)
- Are any of the application fees refundable if I don't get the loan?
- Penalties -
- What is the penalty for late or missed payments?
- Is there a penalty to pay off or refinance the loan before the loan term is up?
After you have answers to these questions, you can successfully negotiate between lenders. Don't be afraid to let lenders and brokers know you are shopping for the best deal.
Once you've selected a lender, get the fees in writing
You will get your fees in writing in the form of a Good Faith Estimate (GFE). The GFE must be sent within 3 days of applying. Study all forms you receive. If you don't understand something, ask for an explanation.
Don't sign if the lender...- Tells you to falsify information on the loan application.
- Pressures you to apply for a loan that has larger monthly payments than you can afford.
- Promises one set of terms but gives you another with no good reason for the change
- Tells you to sign blank forms. If an item is supposed to be blank, draw a line through the blank space and initial it.
Predatory Lending Resources
- Call the Mortgage Fraud Hotline: 1-800-4FRAUD8.
- Contact the California Office of the Attorney General: (916) 445-9555.
Understanding Your Credit
Minimum Credit Scores
Vary by lender and program, but good rule of thumb is a middle FICO score of 620 or above.
Free Credit Report
Find out where you stand. www.freecreditreport.com
Debt Ratios
One of the most important factors in qualifying for a home loan is the debt-to-income ratio. There are two different calculations included in this overall ratio. The first is to figure the housing ratio or "front-end" ratio. This is simply your total monthly housing payment (including taxes and insurance) divided by your gross monthly income, expressed as a percentage.
For example, if your gross monthly income is $5000 and your total monthly housing payment is $1500, your calculation will look like this:
- 1500/5000=.30. Your "front-end" ratio is 30%.
The second calculation is to figure what is known as the "back-end" ratio. In addition to taking into account your housing payment, it includes all other monthly payments as included on your credit report.
For example, if you have a monthly car payment of $250, a monthly student loan payment of $200, and a monthly credit card payment of $100 in addition to your $1500 housing payment, then your calculation will look like this:
- 2050/5000=.41. Your "back-end" ratio is 41%.
In this scenario, the overall debt-to-income ratio would look like this: 30/41.
For Conventional loans, a ratio of 28/36 is preferred.
FHA allows 31/43.
VA uses the back-end ratio only. A figure up to 41% is allowed.
There are sometimes exceptions to these figures based on compensating factors (for example, exceptional credit score). However, it is most important for you as a homeowner to take on a payment you feel you can comfortably afford.
Foreclosure Alternatives
What is Foreclosure?
When a homeowner doesn't make the mortgage payments or meet the terms of the loan over a period of time, the lender can begin a legal process to take possession of or sell the home to recover money owed on the defaulted loan.
Preventing foreclosure:
Call your lender. Ignoring the situation will only make matters worse. The lender may agree to either a loan modification or a short sale. Here's the difference:
- A loan modification changes the terms of your loan to make your payment more affordable. If you stay current with your new payments, you will avoid foreclosure.
- In a short sale, the lender agrees to accept a purchase price that is less than your mortgage amount when you sell your home. Contact a PMZ Realtor for the ins and outs of this popular foreclosure alternative.
In February 2009, the Obama Administration introduced the Making Home Affordable plan to help homeowners avoid foreclosure. For more information on this plan, please visit http://makinghomeaffordable.gov.