Where to Go for Help with Your Mortgage
Web-based resources can help you avoid unsafe loans
It's a buyer's market. But be forewarned: There are still unscrupulous lenders out there, and federal regulators have yet to figure out how to effectively protect prospective homebuyers from getting mired in the national mortgage crisis those scammers helped create.
That's where the editors at This Old House come in. We've forged a path through the thicket of online financial information, and we'll teach you how to use the Internet to steer clear of all that risky loan business now, before it's too late.
We started our research—and so should you—in the Buying and Owning a Home section of Freddie Mac's website. There, you'll learn how various types of mortgages work, like the difference between fixed-rate and adjustable-rate loans. A Rent vs. Buy calculator tells you whether home ownership even makes sense for you right now, while another calculator helps you determine how much house you can afford with your projected down payment and monthly mortgage bills. For information about subprime loans—the scary ones we've all been reading about lately—log on to the Center for Responsible Lending's site. The policy and research group, which is dedicated to fighting abusive lending practices, tells you how to avoid getting saddled with high monthly mortgage expenses you can't manage.
Next, pull your credit scores at MyFICO.com. When you apply for a mortgage, lenders look at scores from three national credit bureaus, TransUnion, Experian, and Equifax, to determine the level of risk they'd take by loaning you money. The higher your scores, the lower the risk for them and the better your chances are of getting more favorable terms and a lower interest rate. If your scores are low, MyFICO explains how to improve the numbers before you even start searching for a home loan. The service costs $47.85. You are also entitled to one free credit report a year from each of the three credit bureaus, but you'll still have to pay fees to get your actual scores. Get your reports at AnnualCreditReport.com.
When it comes time to shop for a mortgage, first check out the tips that AARP recently posted for its members on how to spot predatory lenders. This is a must-read—whether you're 65 or 25—for advice on identifying shady sales tactics and deciphering risky terminology that scam artists use to trap unwitting prospective homebuyers in loans they can't afford to repay. Warning Sign No. 1: Someone who contacts you directly by phone, stuffs a flyer in your mailbox, or knocks on your door in an effort to sell you a mortgage. Legitimate lenders typically don't make such solicitations. They wait for you to make the first move.
Now, start getting bids. The Federal Reserve Board has detailed information about loan providers, such as commercial banks, credit unions, and companies that deal only in mortgages at www.federalreserve.gov. You can even print out a handy mortgage worksheet that details all the critical questions to ask lenders, such as whether you'll be required to get private mortgage insurance (PMI) and how much you'll be expected to pay in closing costs.
Once you get a few bids, go to OfferAngel.com. The new, free service defines in plain English the terms of the various loan offers you've received and provides side-by-side comparisons. For $24.95, an analyst puts together a more detailed report that explains how the terms apply to you and your financial goals, and he or she will alert you to potential red-flag items like hidden fees and payments that fluctuate or increase over time.
OfferAngel.com was co-created by Meg Burns, a former mortgage loan officer who left the business after being frustrated by financial-services companies that offered unclear, incomplete, or misleading information about the loans she was trying to obtain for her clients.
Because government regulations about term disclosure have not kept pace with the number of mortgage products on the market today, Burns says the onus is on the borrower to guard against being taken advantage of. "There are many details about your loan that lenders are not required to tell you unless you ask," she says. OfferAngel.com does not recommend lenders or push one offer over another, nor does it share or sell borrower information. "We simply put all the information in consumers' hands so they can make informed choices," says Burns.
If you feel overwhelmed at any point during your loan search, the federal department of Housing and Urban Development (HUD) has a nationwide system of housing counseling agencies that provide free assistance. Visit www.hud.gov to find a counselor near you. Beware that many for-profit companies will attempt to extract a fee for the same sort of service that HUD provides gratis.
A little advance research online can save you headaches—and potentially thousands of your hard-earned dollars—down the road. "A lot of people get lured in by things like really low teaser rates," says Kathleen Day, a spokesperson for the Center for Responsible Lending. "What they don't understand is how much they're going to pay over time."
How To Spot Predatory Lenders
From the wealth of information out there, we pulled together this essential list of warning signals to watch for when you're shopping for a mortgage.
Excessive early-payment penalties. Up to 80 percent of subprime mortgages carry a fee for paying off the loan early, according to the Center for Responsible Lending. Watch especially for penalties that are in effect for longer than three years or cost you more than six months' worth of interest.
Subprime or nothing. Predatory lenders often push subprime mortgages even when borrowers qualify for a mainstream loan. Always ask how they've qualified you after you've received an offer.
Unnecessary products. Lenders build extra services or unneeded insurance into the loan to pad their income.
Signing away your legal rights. Watch out for language that forbids borrowers' use of legal help and the court system if they find their home ownership is threatened by loans with illegal or abusive terms; such language makes it less likely that borrowers will receive fair treatment in case of wrongdoing.
Unauthorized refinancing of your loan. Don't let lenders "flip" or refinance your mortgage in a manner that robs you of your home equity.
Vague or aggressive sales tactics. Beware of lenders who solicit you with offers that seem too good to be true or won't answer your questions clearly. Another common scam is to work the "offer good for a short time only!" angle. A mortgage loan isn't a gallon of milk—succumbing to anyone pressuring you with this line would be an unwise decision.