Tips For Avoiding Borrowing Pitfalls

Source: Freddie Mac

Say NO to "easy money." Borrowers should beware if someone claims "credit problems won't affect the interest rate." Avoid solicitations for loans that sound too good to be true. If it sounds too good to be true, it probably is. If a solicitation is really interesting, get it in writing!

1. Shop around. Borrowers should talk to several lenders to find the best loan for which they qualify. A loan product or lending practice may not seem predatory until compared with a similar loan product offered by other lenders.

2. Understand the loan terms. Borrowers should compare loan terms from different lenders. Understand the best loan terms available in the marketplace and compare the APR (annual percentage rate) of loans from different lenders. The APR takes into account both the interest rate and the points and fees of the loan. A nonprofit housing counselor or a lawyer can review the information with a borrower.

3. Find out about prepayment penalties. Borrowers should know if the loan offered to them has a prepayment penalty. Prepayment penalty should be a choice, not a requirement.

4. Make sure documents are correct. Be cautious of someone who offers to falsify a borrower's income information to qualify for a loan. Borrowers should never falsify information or sign documents that they know to be false.

5. Make sure documents are complete. A borrower should not sign documents that have incorrect dates or blank fields. Be wary of promises that a lender will "fix it later" or "fill it in later."

6. Ask about additional fees. Borrowers should question any items they didn't ask for. Borrowers should also beware if they are told that single premium credit insurance is required get a loan, or that purchasing it will help loan approval. Review every fee and compare different lenders' fees to ensure the most competitive loan terms.

7. Understand the total package. Ask for written estimates that include all points and fees. The situation may not seem abusive until everyone gets to the closing table. If any fees or charges differ from what was previously disclosed, delay the closing until all terms of the loan are clearly understood.

8. Work with credit counselors. A borrower should get all the facts before deciding to combine credit card or other debts into a home loan. Beware of scam credit counseling/ credit consolidation agencies -- unfortunately, not all credit counseling agencies are acting in your best interests. Talk to a community based consumer credit counseling agency or housing counselor before signing the loan documents.

9. Protect home equity. If borrowers are taking equity out of their property, they should take out the minimum amount needed. The equity in a home is a source of wealth, which builds up slowly over time.

10. If you're not sure, don't sign! Get advice first! Talk to a community based consumer credit counseling agency or housing counselor.

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