Of all the processes that go on within a real estate transaction, there are a few things that need to be paid attention to. Though not illegal, it can be annoying to be on the receiving end of subtle errors in the decision making processes.
Four of the more troublesome practices within the loan process, as recognized by the Federal Reserve are:
Prepayment penalties: When borrowers seek to pay off expensive loans early they may be hit with a fee of as much as six months of mortgage payments. (It's usually specified in your paperwork.)
Failure to require escrows for taxes and insurance: These expenses add to the monthly costs of home ownership but mortgage servicers do not always require borrowers to bank the payments in escrow accounts with them. As a result, the payments may be put off, resulting in tax delinquencies or insurance coverage lapses.
Stated income and low-documentation lending: "So-called "liar loans" that encourage borrowers to exaggerate income to qualify for larger mortgages than they can handle. (Can we say housing market crisis? Or market meltdown?)
Failure to give adequate consideration to a borrower's ability to repay a loan: Many loan originators have no monetary interest in loans after the deal is done. That encourages them to approve borrowers they know, or should know, cannot afford to make the payments.
These practices are not, in themselves, issues, because borrowers may rightly choose a loan with hefty prepayment penalty if that lowers the interest rates on their loans.
The problems arise when loan originators apply these provisions indiscriminately or with predatory intent. (If you read your contracts, you won't be surprised.)
See the whole article (dated Jun '07, but still relevant) over at money.cnn.com
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Four of the more troublesome practices within the loan process, as recognized by the Federal Reserve are:
Prepayment penalties: When borrowers seek to pay off expensive loans early they may be hit with a fee of as much as six months of mortgage payments. (It's usually specified in your paperwork.)
Failure to require escrows for taxes and insurance: These expenses add to the monthly costs of home ownership but mortgage servicers do not always require borrowers to bank the payments in escrow accounts with them. As a result, the payments may be put off, resulting in tax delinquencies or insurance coverage lapses.
Stated income and low-documentation lending: "So-called "liar loans" that encourage borrowers to exaggerate income to qualify for larger mortgages than they can handle. (Can we say housing market crisis? Or market meltdown?)
Failure to give adequate consideration to a borrower's ability to repay a loan: Many loan originators have no monetary interest in loans after the deal is done. That encourages them to approve borrowers they know, or should know, cannot afford to make the payments.
These practices are not, in themselves, issues, because borrowers may rightly choose a loan with hefty prepayment penalty if that lowers the interest rates on their loans.
The problems arise when loan originators apply these provisions indiscriminately or with predatory intent. (If you read your contracts, you won't be surprised.)
See the whole article (dated Jun '07, but still relevant) over at money.cnn.com
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