In January of 2009, as the housing market collapsed, I took a job blogging for a law firm that specializes in predatory lending and wrongful foreclosure lawsuits.
I read case after case about borrowers who signed documents for loans that came with interest rates and other costs that were far higher than what they believed they were getting. Even when the correct documents were provided, borrowers had trouble understanding them—especially when lenders rushed them through closing.
When those loans ended up in court, many judges had no sympathy for the borrowers because they couldn’t see the power imbalance between the lender and the borrower. Unlike with business contracts, the vast majority of mortgage borrowers don’t have attorneys, aren’t qualified to understand the contract and have no opportunity to negotiate changes. In my opinion, too many courts dismiss these factors, saying that borrowers are legal adults who aren’t under duress, so they knew—or should have known—what they were signing.
Public opinion is even harsher. No matter how clearly an article lays out the bank’s role in a foreclosure, online commenters tend to blame the borrower’s lack of “personal responsibility.” Looking back, I see that I was also guilty of thinking that the key to avoiding predatory lending is a matter of education and careful reading.
Last fall, I realized just how wrong that thinking was when my husband and I decided that we were ready to buy a home.
I felt confident going in: I was plugged into the legal world, understood typical predatory lending and had plenty of lawyer contacts who could help. But, by the end, I was convinced that not even a well-informed layperson like me has a good chance of understanding loan documents—and the system needs serious reform.
Why You Really Can’t Shop Around
When we were looking to buy, it was a seller’s market in our area. In this climate, buyers’ chances substantially improve if they first get “pre-approved” for a mortgage by a lender before they make an offer because the seller knows that the deal won’t fall apart over lack of funding.
To get pre-approved, the lender asks for documentation on all of your assets and debts, and pulls your credit score. It’s not real loan underwriting—that comes later, which I’ll explain below. But, in a seller’s market, your real estate agent will probably pressure you to get pre-approved long before you’re ready to make an offer.
This process—and the accompanying time pressures—makes it hard to use a lender other than the one who pre-approves you. Plus, lenders expressly warn that the pre-approval may not look like your final loan—when your offer is accepted, the lender checks your financial situation again to make sure that it hasn’t changed.
Unfortunately, this means that there’s risk in getting more than one lender’s opinion because, depending on the formula that the credit-requesting company uses, your credit rating could actually be harmed if several lenders pull your credit score over a “shopping period” that exceeds 14 to 45 days.