There will always be those who try to profit from the misfortunes of others and the current housing market woes are no exception. There are many scams and pit falls that a new home owner can fall into, especially one that is having trouble making their monthly mortgage payments. One such scam, which has grown explosively over the last few years, comes in the guise of Loan Modification Companies.
When someone is behind on their mortgage payments or having trouble making each payment, it often causes them to want to look for an easy fix, so they drop their defenses a little bit. This is exactly what a loan modification company counts on, as they specifically target those in foreclosure or who are struggling to make each mortgage payment.
The loan modification scam usually starts with a letter, a dishonest website, or a call from a telemarketer, which promises that the company can help refinance the mortgage and secure the homeowner a much lower interest rate. These individuals, who are usually nothing more than snake-oil telemarketers who are adept at social engineering, pray upon the fears and troubles of those facing foreclosure, promising to speak with the mortgage holder and negotiate better turns.
However, before they will do any work, they require a large upfront payment. Often, the telemarketers will encourage the homeowner to stop paying their mortgage payments and instead pay the loan modification company, with the promise that they will be able to get the mortgage refinanced.
What loan modification companies won’t tell you, however, is that they can not stop foreclosure and have no direct association with any reputable lenders. Instead, they take the homeowners money, usually at the expense of paying their actual mortgage, only to cut off communication once they have conned enough money from the homeowner.
It is easy to ask how this is possible and much of it has to do with the mind state of those that are facing foreclosure, who are searching for anything that might help them save their home and credit.
However, the companies also operate in a manner that avoids much regulation, by changing their names frequently and setting up dummy corporations. There are hundreds of websites developed by these loan modification hucksters, which are designed to generate leads for their telemarketers.
Usually, by the time people start reporting these companies to the Better Business Bureau or other regulatory agencies, the loan modification company has already moved on.
Today, loan modification firms are more prevalent and profitable than ever, praying off of the large number of foreclosures.
One of the biggest warning signs of a loan modification firm is that they require money up front, before doing any work. This is common amongst most credit fixing scams, so should immediately raise warning flags. Also, if they suggest not paying your mortgage, this is also an indication that they are not operating in your best interests.
It is also very important to research the companies and keep in mind if you can’t find any information on sites like the Better Business Bureau, they could very well be trying to scam you.
This is not to say that all organizations that help fix credit or prevent foreclosure are bad, with there being a number of not-for-profit organizations and several government programs that are designed to do just this. However, it is extremely important to research the company and use good judgment, rather than letting the fear tactics of these scam artist work against you.
A Lock-In is the term used to describe when a lender promises to offer a specific interest rate and loan terms for an extended period of time. With the rapid fluctuation in the housing market and interests rates that can vary multiple times everyday, getting your lender to offer a lock-in can be a very important tool when shopping for a mortgage, but there are also some situations when a lock-in could end up working against you.
People use Lock-Ins, or rate locks, because from the time you apply for a loan to the time you are approved can sometime stretch on for weeks. During this time, interest rates could go up, so if you do not have a rate commitment from the lender, there is nothing keeping them from changing the terms of the loan to a higher interest rate.
Since the way lenders handle rate lock-ins can vary, it is very important to bring up the subject before applying for a mortgage and find out the lenders policies.
Sometimes. This can vary depending on the lender, with some mortgage lenders requiring a lock-in fee to guarantee your interest rate. If the interest rate and points are extremely competitive, than it may be worthwhile to pay this fee. However, most lock-in fees are non-refundable, so it can be a little risky and another added expense, which seem to pile up when you are purchasing a home.
It is important to consider is your credit rating, because if you are unsure whether you will qualify for the loan, it might not be worth using the money. Also, since mortgage brokers are often not working with your best interests in mind, these charges can often simply add a nice bonus to the mortgage brokers pocket.
If you do pay a lock-in fee, make sure that you get it in writing, which is really good advice even if you do not pay anything for the rate-lock.
This can vary, but most Lock-Ins are for 30 or 60 days. It is a good idea to ask how long the lender takes to approve loans and consider the housing market. If it looks like it may take awhile to find a home or get approved, it is a good idea to ask for a longer lock-in.
When the lock-in expires, it is sometimes possible to just re-extend it if the market has not changed. However, the lender is under no obligation to do so and if interests rates have gone up, they will not typically re-extend the lock-in.
If the interest rates go down and you have already requested a lock-in, it can create some problems, as the lender may not want to lower the rate. In the case of a very large drop in interest rates, it is a good idea to put you foot down and demand an increase, although to start with, you should simply ask them if they can.
If the lender refuses to honor the lower rate, you can simply walk away, although this can be hard if you have poor credit.
Before you request an interest rate lock-in, it is a good idea to do some market research, paying close attention to interest rate trends. This will allow you to better analyze the mortgage interest rate and determine if it is a good deal. It is also important to spend some time talking with other lenders and exploring the housing market.
There are many types of subprime mortgages, but one of the most predatory types of mortgages is the Negative Amortization Loan. Negative Amortization Loans can sound attractive at first, but after a few years, it is very easy to end up owing more money on your mortgage than you initially paid.
In a negative Amortization Loan, the monthly payment is less than the total amount of interest owed for that period of time. This difference is then added back onto the loan, which raises the total amount of money that is owed to the mortgage lender.
Negative Amortization Loans are sometimes called a deferred interest loan, Graduated Payment Mortgage(GPM,) or NegAm Mortgage. No matter what the name, if you are paying less than the normal amortization amount every month, you are in a very dangerous position.
Amortization is used to refer to how the payments of a loan will be used to pay down a mortgage. During normal amortization, part of your payment goes toward the interest of a loan and part of it goes towards the principal of the loan.
At first, more of each payment goes towards interest than principal, but over time, this reverses and you begin to pay more towards the principal of the home and less in interest.
To see how each of your payments are used, you can view an Amortization Table, which most lenders will freely provide you with. The Amortization Table will break down all of your payments by month, showing you how much principal you owe after each payment.
A negative amortization loan is when each monthly payment is less than the total amount of interest owed on the loan. The interest that is not paid is then tacked onto the principal of the loan. As a result, each month that you pay negative amortization, the amount you owe on the home increases.
So, as an example, say that during the first year of a 30 year mortgage, a normal mortgage payment would be $500 a month, with $400 going towards interest. In a negative amortization loan, you might only pay $250, with $250 getting added onto your total mortgage balance each month.
As a result, this not only increases how much you owe on the home, but it also increases the amount of interest you owe.
Due to legislation, this is usually only allowed to happen after up to five years, which is referred to as the recast period. However, in five years time, paying negative amortization can result in owing many thousands more than what you paid for the home and what it is worth, which makes selling the home very difficult.
Many people who have negative amortization loans end up short selling, which means selling the home for less than they owe. This is because the principal of the loan vastly exceeds the homes actual value, which is referred to as being underwater on a loan.
When negative amortization loans are coupled with an adjustable rate mortgage, which has an increasing interest rate every few years, it is very easy to end up underwater on the loan. When the adjustable rate increases, which it will, this means that all of the money added on by negative amortization, will also increase.
There are many problems with negative amortization mortgages, which often result in drastic increases in mortgage payments each month. This is often referred to as payment shock, where the amount owed month by month can rapidly increase after the recast period.
While negative amortization loans can be very dangerous, if you plan on quickly selling a home for a profit, it can be a good investment tool, as you will have a lower monthly payment. However, this is very dangerous, as if you can not sell the home or if the value of the home decreases, you will end up owing more than the home is worth.
Many first time home buyers get into trouble over these types of loans, because they have a very low initial monthly payment, which can seem very attractive. However, once the grace period is over and the rate increases, they soon realize they have entered into a predatory loan.
Buying a home is a very big investment and most people use a mortgage, which is a special type of loan, because they do not have the money available to buy a home upfront. Since purchasing a home is such a large investment, and in some cases the biggest of a persons lifetime, it is important to get the best deal on your mortgage. There are many factors that go into evaluating a mortgage and finding a good lender.
One of the most important considerations is the interest rate of the mortgage. The interest rate can vary, based off of the current market, as well as the credit of the person applying for the mortgage. It is essential to have an idea of what the normal interest rate is, so that you can better compare mortgage offers from various lenders.
It is important to understand that mortgage rates can vary on a daily, hourly, or even minute by minute basis. They are not set directly by the lender, but are instead a reflection of a number of factors, which are based heavily upon the current market and economic situation.
Since interest rates can vary frequently, the advertised interest rate is often not very accurate. It is simply not practical, affordable, or possible for a lender to update their advertised mortgage rate every time it changes, so there is no guarantee that you will get the same mortgage rate you see in the newspaper or even online.
In many cases, this is simply a reflection of how often the mortgage rate changes, but there are some dishonest mortgage lenders who purposely advertise a much lower interest rate than they actually offer. So, it is important to always look at advertised mortgage rates cautiously and when speaking with a lender, make sure to ask them how often their mortgage rates are changed.
When you actually apply for a mortgage, especially if there is an application fee, make sure to ask if the mortgage rate is guaranteed and for how long they will honor this guarantee.
While interest rates play a big role in the overall cost of a mortgage and the monthly payments, there are many other costs associated with a mortgage. The closing costs of a home can easily exceed $3000 and even more, depending on the cost of a home. So, it is very important to ask your mortgage lender about any fees and charges that will be associated with the mortgage.
Remember that there is almost never a situation where you will pay nothing in closing costs, so if this is offered by a mortgage lender, you should be very suspicious and make sure to ask them how they get paid and what other fees are associated with the mortgage. In almost all cases, you will find that the $0 closing costs are offset by a number of fees and other charges.
Points are one way that lenders get paid and represent a percent of the total cost of the home, which is paid up front. So, if a lender requires you to pay 1 point on a $100,000 home, you would have to pay them $1000, which is 1% of the total cost of the property. Often, by paying more points, you can get a better deal on your mortgage and lower interest rates, but it can also add up very fast.
It is important to ask about points and other fees like these and compare these fees among lenders, so you can have a better idea of who is really offering the best deal on a mortgage.
It used to be that when you bought a home, lenders required a 20% down payment. Over time, lenders began to relax this requirement, often because the higher your mortgage amount, the more they get paid over the course of the loan.
However, a lot of lenders require that you purchase Private Mortgage Insurance(PMI) if you are not going to have enough money for a 20% down payment. PMI guarantees that if the home goes into default, a portion of it will be covered by the insurance company.
Make sure to ask the mortgage lender whether Private Mortgage Insurance is required and how long it is needed. Often, it is only required until there is 20% equity in the home, but remember that they will not cancel it automatically and instead you must request that the lender cancel it when you reach this point.
It is important to explore all of your options, so you can get a good deal on your mortgage and so you have a basis for comparison to compare different mortgage offers. One of the best places to start is your current bank, as they will usually offer fairly standard interest rates and can usually give you an answer fairly quickly.
You bank also might not require any money towards an application fee, although all reputable lenders will provide you with a free estimate, without actually checking your credit or financial information. Even though they are not checking your information at this time, it is important to be honest, because when it comes time to actually apply for the loan, they will run your credit and check your references, so any dishonesty will be uncovered.
By starting with your bank, you will have an idea of what a standard interest rate is, as most banks do not offer subprime mortgages. This will give you a basis to compare other mortgage lenders and mortgage brokers, so you can get the best deal on your home loan.
One of the most important parts of buying a home is obtaining a mortgage. Since most people do not have the money to buy a home outright, they must instead rely upon a lender to loan them the money to purchase the home. As a result, once the mortgage is obtained, the rest is often downhill, although waiting for your offer on a home to be accepted can be very nerve racking. Since a mortgage represents such a long term commitment and investment, which for many is the biggest investment of their life, it is not a decision that should be taken lightly. Instead, it is important to spend some time shopping around and find the best deal.
Typically, one of the first decisions is whether to go to a mortgage broker or a mortgage banker to get your home loan. A mortgage broker is sort of like a middleman, who acts as a go between for banks and people looking for a mortgage. Mortgage bankers, on the other hand, represent actual banks that offer mortgages. Both mortgage brokers and mortgage bankers have disadvantages and advantages, which vary depending on your situation.
Even just twenty years ago, the mortgage industry was dominated by banks. When it came time to get a mortgage, most people went to the bank where they had their checking account and asked for a loan. This slowly changed as other companies and investors began looking at the high returns offered by the mortgage industry and decided to enter into the business of backing home loans.
One of the main advantages of having your bank finance your mortgage is that they will often take not only your credit rating into account, but also your personal history with the bank. This is especially true of credit unions, which sometimes have a much more personal loan approval process. Mortgages offered by banks are also more likely to be less risky and offer a very competitive rate. They are also typically able to move much more quickly than other lenders to approve or deny a loan. In addition, the fees associated with a mortgage from a bank are often lower, as they will hold the loan for its length, making their money this way.
However, while many banks will take into account your history with them, they also tend to have higher standards, especially in todays market. Gone are the days where mortgage lenders rely primarily on personal feelings, with most instead having a set mathematical formula that the borrower must meet. This means that often, a bank will only offer a mortgage to those with a very high credit score. Since the bank makes a great deal of money from other investments, they can afford to be much more picky.
It is a good idea to spend some time building up your reputation with your bank, such as by taking out a small line of credit and keeping it well maintained.
Mortgage brokers, on the other hand, typically have several mortgage lenders they work with. This could be an actual brick and mortar bank, but is often simply a group of investors that buys and bundles mortgages and then sells them to other investors.
As a result, the person that initially funds the mortgage is not the same person that holds it in a years time. This can cause some problems, as has been seen in the latest housing market crisis, where the initial lender lacks the incentive to ensure the person has good credit, because they know they will only hold the mortgage for a few months. This can be a bad thing, but it also means that those with lower credit, often have a much better chance of getting a loan from a mortgage lender. Of course, as a consequence of the current housing market, most lenders have become much more strict in their lending.
Since a mortgage broker is simply a middleman, they often have access to multiple lenders and can often offer much more competitive rates and has more options. However, a mortgage broker gets paid by commission and gets a fee based off the total loan amount. This fee is many times greater than that of a bank and also, since they are personally motivated by commission, mortgage brokers do not always have your best interests at heart.
As with any financial decision, it is a good idea to explore all of your options. Many people start with their bank, as this banks can usually move very fast and have a personal relationship, which can often mean a greater chance of approval. By starting with your bank, you can also get a feel of current interest rates, so when you contact a mortgage broker, you have a way to measure what type of deal they are offering you.
When applying for a mortgage, the number of different costs and charges can quickly add up. From application fees to home appraisals, it seems like everyone has their hand out. Some of these fees and charges are a normal part of the mortgage process, while others may not be.
It is very important to understand what types of charges are normal when purchasing a home and what types of charges are junk fees. Junk fees are one time fees that are added by the mortgage lender. With the exception of interest and principal fees, most other charges are junk fees. It is important to question these junk fees, as they are often negotiable, but you will not know unless you ask.
Below, you will find a list of some of the common costs associated with a mortgage.
Application Fees: Application fees are also sometimes called processing fees and vary in price, but are usually between $300 and $400. An application fee may be refundable, but it is usually not. It is very important to ask about refunds before paying the application fee. More and more lenders are waiving application fees, but often they tack these fees on somewhere else, after the mortgage is processed, highlighting the importance of questioning all junk fees.
Credit Report Fees: Many lenders will charge the mortgage applicant for the cost of running their credit. The cost of a credit report should not exceed $20 and it is possible to purchase your own and save a few dollars. If a lender tries to tack on a few extra dollars for your credit report, this is a red flag, as most creditors get a bulk discount on credit reports.
Origination Fee: This is a fee charged by the lender to process your mortgage. It is also sometimes called an administration fee or commitment fee. Sometimes the origination fee can be waived, as the lender is making money on the loan and points already. It is important to question this fee and if it is excessive consider using a different lender.
Points: In addition to the origination fee, points are another way that the mortgage lender gets paid. Typically, the points is related to the interest rate, so with a 5% interest rate, they might charge you .05% of the cost of the loan up front. Sometimes the points are negotiable, but the lender could charge you a higher interest rate if you do not want to pay the points.
Prepaid Interest: When you close on your home, you will not be responsible for your first payment right away. Depending on when in the month you close, it could be two months before your first mortgage payment. However, the lender will require that you pay interest between this time, which is the prepaid interest. Make sure to talk with your lender to determine when would be the best time during the month to close, so that you pay the least amount of interest or have the longest time between your first payment.
Lock-In-Fee: Some lenders may charge a fee to guarantee an interest rate while you are looking for a home. This is considered a lock-in-fee and in reality most quality lenders do not charge anything to guarantee an interest rate, however you should get this in writing. If the lender does charge a lock-in-fee, this is a junk fee and if they are unwilling to remove it, this is another red flag that can indicate a less than reputable mortgage lender.
Title Insurance: Like a car, all homes have a title of ownership. When purchasing a new home, a title search is preformed to ensure that no one else has a claim to the property and that there are no liens on the property. Title insurance protects the interest of the bank in case the title search turns up another owner or a lien on the home. The cost can vary, but it usually costs around $200.
Documentation Preparation: This is a junk fee that can often be avoided, because with todays technology, it does not take too much effort to prepare the paperwork for the mortgage.
Underwriting Fee: The underwriters of a loan are the people who take the time to analyze the credit worthiness of the loan applicant. Often, this fee is a junk fee and is not needed. It is a good idea to speak with the lender and have them describe exactly what their underwriters do, as well as questioning the fee.
Property Tax Fee: It is usually necessary to pay the current years property taxes, as well as setting some money aside for next years property taxes, at the time the loan is completed.
Tax Service Fee: Some lenders require that the payments of the property taxes are verified, but this is often a junk fee. It is important to question the lender on this fee, ask them how it is verified, and to see the verification. This tells the lender that you know it is a junk fee and can help you determine if the lender is reputable.
Private Mortgage Insurance(PMI) Fee: Some lenders require private mortgage insurance if less than 20% is put down on the home. PMI partially insures the mortgage and if required, is used until 20% equity is built up in the home. Some lenders require a fee for setting up PMI, but it is a good idea to question this cost. Also, lenders will not usually automatically remove PMI once you have 20% equity, instead waiting for the mortgage owner to question the charge.
Survey Fee: A survey is often done to mark the boundaries of the property. A survey can be a good idea if there are close neighbors or structures on the boundary of the property of questionable ownership. In some cases a survey may be required in order to receive title insurance. Typically a survey is, compared to the other mortgage fees, rather inexpensive and can be a good idea to get an idea of how much land you own. If you decide not to get a survey, you can sometimes see the marking of a previous survey, such as flags on trees or marks on the road, to get an idea of your land’s boundaries.
Appraisal Fee: A home appraisal is used to determine the value of a home, so the mortgage lender can ensure that you are getting a fair deal. The appraiser will evaluate the condition of the home, as well as considering the recent sale price of other similar homes in the area. The cost of an appraisal is usually around $300 and is required when purchasing a new home or refinancing your existing home.
Appraisal Review Fee: This is a junk fee that should raise some warning flags, because it is basically an appraisal of the appraisal. If the lender is so uncertain of the the companies that do their appraisals that they require someone else to review it, you might want to look elsewhere for your loan, as the alternative is that the lender is just trying to fleece you of some extra money.
Courier Fees: Sometimes a lender may charge a fee to transport the mortgage package between the lawyer and mortgage office. However, this fee is often not needed unless it is an out of state transaction or there is a short window of time that the loan must be completed in. It is a good idea to question this fee, as it is often unnecessary.