Mortgages 101

Purchasing a home is one of the biggest investments a person can make. It is also a very intricate process and, unfortunately, one ripe with opportunity for fraud. It is essential that potential homebuyers do their research and thoroughly investigate not only the property they are interested in, but also the people they are working with to purchase that property.

In this section, you will learn about the key players involved in the process, red flags to look out for and how to protect yourself against mortgage fraud.

Who's who in the home buying process

The borrower – the borrower is you, the consumer. It is important for you to educate yourself on the basics of purchasing a home before going into business with a broker and/or lender. The more you know as a buyer, the less likely you are to get taken advantage of during the often complicated process. You should also know your credit score. If you have a lower score, work to raise it before applying for a loan.

The mortgage broker – the mortgage broker is the liaison that brings together a lender and a prospective borrower for a fee. Sometimes the broker receives two fees for a successful real estate closing: one fee from the borrower (at the closing), and a second fee from the lender (paid outside of the closing).

Mortgage brokers are required to give the borrower a written “Loan Broker Services Contract” that lists the following:

• the dollar amount of the proposed mortgage
• the mortgage broker fee, expressed as a percentage of the mortgage
• the time period during which the borrower must work with the mortgage broker exclusively

The mortgage broker is also required to give the borrower a written “Good Faith Estimate of Closing Costs” within three business days of taking the mortgage loan application.

The lender – the lender is the party who funds the borrower’s loan. The lender ultimately controls whether and when the real estate closing happens. Most mortgage brokers submit the borrower’s loan package to several lenders. Lenders then decide whether or not to fund the loan based on a credit risk analysis.

Red flags during the mortgage lending process

1. Shift in the closing date – borrowers should secure a written commitment letter from the lender for the closing date.

2. “Free” refinance offers – sometimes mortgage brokers will promise a “free” refinance in the event mortgage rates drop further from the borrower’s present mortgage interest rate. If this offer is made, the borrower should get the offer signed and dated in writing.

3. Over-appraised residential real estate – this occurs when an unscrupulous broker, appraiser and/or real estate agent collude to get a property appraised at a value grossly above its market value.

4. Undisclosed pre-payment penalties, balloon payments and rate and terms switched at closing – loan terms are required to be disclosed early in the process, however changes do occur. Borrowers must stay on top of any term changes.

5. Post-closing squeeze for more fees – the HUD-1 Settlement Statement must list all fees paid at the closing table or paid outside of closing. Anyone who solicits the borrower for more money after closing is acting illegally.

Protecting yourself against mortgage fraud

The majority of loans originated in Indiana are by honest, ethical mortgage brokers. As a potential homebuyer, it is important to know how to find the good brokers, and avoid falling victim to fraud with the bad. Here are some tips for protecting yourself against mortgage fraud:

• Make sure your loan broker is licensed and registered with the Secretary of State Securities Division by calling 1-800-223-8791 or using the searchable database.
• Get everything in writing and keep copies of all documents you provide to your loan broker.
• Get a complete Good Faith Estimate of Closing Costs.
• Be wary of reverse mortgages. They are legal, but really only appropriate for people age 62 and older who own their home.
• Report any suspicious and/or fraudulent activity to the Securities Division

Related Information:

- Visit Making Home Affordable

- Visit Indiana Foreclosure Prevention Network

- Visit Housing and Urban Development

- Get a free annual credit report

- Check mortgage rates

- Practical Money Skills: Buying a Home

- Learn more about reverse mortgages

- Read glossary of mortgage terms