What lies might I hear?

Unethical lenders will often lie about the following topics:

  1. "Locking in market rates" - When you lock in a rate, it should be the market rate on the day that you lock. However, an unethical lender might lock you in at a rate above the market rate, trusting that you won't find out. The availability of rates on the Internet has made this practice more difficult, and you should use the web to protect yourself: ask the lender if they have a website where they post their rates each day, and check other websites, like Loan.com, to see if rates move between the day of your quote and the day of your lock.
  2. "Having to do an ARM" - An unethical broker or lender might tell someone that they need to get an adjustable-rate mortgage (ARM) instead of a fixed-rate mortgage (FRM) for self-serving reasons. Some brokers or loan officers get a bigger cut on ARMs than FRMs, and they could be letting that profit motive influence their advice to you. To avoid this problem, make sure the broker or lender lays out the exact reasons why you wouldn't qualify for an FRM (e.g., too low a FICO score, too little income relative to housing expense).
  3. "Cost-free loans" - An unethical lender might tell you that you can get a loan with no settlement costs -- a "cost-free" or "no-cost" loan. Don't believe that lender. There are always settlement costs. What is really happening is that those costs are being bundled into the loan amount, or the lender is picking up the tab on the settlement costs in exchange for a higher rate. Both are perfectly acceptable ways to structure a loan, but you shouldn't kid yourself that you're getting away without paying settlement costs. And you should be sure to include those indirect ways of paying settlement costs in your "cost-free" loan when you stack it up against other loan offers.
  4. "Settlement costs are non-negotiable" - Some lenders will have you believe that fees for all of the various settlement activities -- document preparation, couriers, appraisals, credit reports, flood certification reports -- are locked in stone. That's not true. You should press your lender to justify and explain every fee, compare fees to see if one lender charges more than another, and try insisting that some or all of those fees be reduced. Just because these fees seem small compared to the property price, don't swallow them without a challenge!
  5. "Prepayment penalties" - An unethical lender might lie when saying that a loan carries no penalty for paying it off early. They say it to make the loan seem less restrictive and more attractive - especially for those who think they might refinance one day, which requires prepayment of your initial loan. But the only way to know for sure whether there's a prepayment penalty is to check the Truth in Lending disclosure form that you receive as part of the mortgage process.