Foreclosures increased 94 percent last year to 157,417 homes in California, as homeowners struggle with fast-rising home payments and a slow-selling market, a Fair Oaks real estate investment advisory firm reported last week. California had the most foreclosures filed nationwide, while Nevada had the largest percentage increase at 175 percent last year compared to 2005, according to ForeclosureS.com.
Nationwide, almost 971,000 foreclosure filings were reported last year, 51 percent more than the 641,000 in 2005, according to the report.
For most families, buying a home is the biggest purchase they ever make. Unfortunately, not all loans are in their best interest. It's important to learn the warning signs associated with predatory lending, and to ask the right questions when shopping for low cost loans.
Realtors develop relationships of trust with the families they serve, and can help their clients avoid predatory loans by encouraging careful shopping, said Mark Burns, 2007 president of the Silicon Valley Association of Realtors® (SILVAR). Burns referred to the old saying, "If it sounds too good to be true, it probably is."
He advises homebuyers to check out the following possible warning signs of a predatory loan contained in "Shopping for a Mortgage? Do Your Homework First," a brochure published by the National Association of Realtors® (NAR) and the Center for Responsible Lending:
• It sounds too easy: "Guaranteed approval" or "no income verification" sometimes indicate the lender doesn't care whether you can afford to make the payments over the long haul.
• Excessive fees: Make sure fees are typical of those in your market. Because these costs can be financed as part of the loan, they are easy to disguise or downplay. On competitive loans, fees are negotiable. It is common for home buyers to pay only one percent of the loan amount for prime loans. By contrast, a typical predatory loan may cost five percent or more.
• Large future costs: High-risk adjustable rate mortgages with payments that rise substantially after a short introductory period are seldom appropriate for families who already have had problems repaying other loans. Home buyers should also avoid a large, single "balloon" payment (a lump sum due at the end of the loan's term).
• Closing delays: A lender who deliberately delays the closing may be waiting for the commitment on a reasonably-priced loan to expire.
• Over-valued property: Inflated appraisals can allow for excessive fees to be included in the loan, resulting in the borrower owing more to the bank than the home is worth.
• Barriers to refinancing: Prepayment penalties can make it hard for borrowers to refinance and take advantage of lower-cost loans.
• No down payment loans: These loans may be split into two mortgages, with one having a much higher cost. Home buyers should be sure they can afford the payments.
• Unethical document management: An ethical lender or broker will always require you to sign key loan papers, and they will never ask you to sign a document dated before the date you sign it.
Ask the right questions when shopping for the lowest-cost loan:
• What is my credit score? Can I have a copy of my credit report?
• What is the best interest rate today? Do I qualify?
• Is the loan's interest rate fixed or adjustable?
• What is the term (length) of the loan?
• What are the total loan fees?
• What is the total monthly payment? Does this include property taxes and insurance? If not, how much will I need each month for taxes and insurance?
• Is there an application fee? If so, what is it, and how much is refundable if I don't qualify?
• Are there any prepayment penalties? If so, what are they and how long do they last?
If the loan is an adjustable rate mortgage (ARM), ask:
• What is the initial rate?
• How long will that rate stay in effect?
• How is the adjusted interest rate determined? (Generally, a specified amount-the "margin"-is added to a current published rate-the "index.")
• How often can the rate change?
• How much can the rate go up each year and over the life of the loan? What is the maximum monthly payment you could be required to pay? Would you be able to afford it?
• Does the loan set a minimum interest rate?
• Do the monthly payments gradually decrease the amount you owe even if interest rates increase? (With some loans, the amount you still owe can increase rather than decrease each month-called "negative amortization.")
• Does the interest rate increase if your payments are late?
• Could you qualify for a loan with the maximum interest rate permitted under the mortgage? If not, do you anticipate earning more in the future so you will be able to afford the higher payment?
• Can the adjustable rate mortgage loan be converted (changed) to a fixed rate without refinancing into a new loan? Is there a charge to convert?
The Silicon Valley Association of REALTORS® (SILVAR) is a professional trade organization representing over 4,000 REALTORS® and Affiliate members engaged in the real estate business on the Peninsula and in the South Bay. SILVAR promotes the highest ethical standards of real estate practice, serves as an advocate for homeownership and homeowners, and represents the interests of property owners in Silicon Valley.
The term "REALTOR®" is a registered collective membership mark which identifies a real estate professional who is a member of the National Association of REALTORS® and who subscribes to its strict Code of Ethics.
Variations of this article have appeared in local area newspapers.
For further information, please contact Rose Meily at SILVAR Public Affairs, email , or phone (408) 200-0109.