11 ways to keep from getting snookered at the closing table
That pile of mortgage papers you sign could contain fraud or errors that expose you to massive costs or even criminal charges. Here's how to protect yourself.
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That 6-inch stack of documents you sign when you buy a house or refinance your mortgage? Well, here's something to keep you awake at night: It could contain fraud or errors that would expose you to hundreds of thousands of dollars in costs or even criminal charges.
Borrowers sometimes blithely sign papers at their mortgage closing without comprehending them. It's understandable. You're eager to get the business wrapped up. But even though the end is in sight, don't relax yet. The closing conference, where you sign contracts and disclosure papers, is a crucial moment, and one that could expose you to serious risks. (Bing: Find the average closing costs in your state)
One risk is the chance you'll get caught up in fraud. Whenever large amounts of money change hands, as in real-estate and mortgage transactions, bad actors have a way of occasionally worming their way in.
"You see someone just hand a document across the table and you have no idea if that's legitimate," says Andrew Liput, president of Secure Settlements, which screens closing agents for lenders.
At the least, you could miss an error with serious consequences. "Borrowers are relying on everybody at the table doing what they're supposed to do," Liput says. But "one mistake can cost them a huge amount."
Read on to learn the dangers for consumers at a mortgage closing and 11 ways to protect yourself.
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Real-estate and mortgage professionals create and transmit mountains of documents every day. Opportunities for mistakes, typos and omissions abound.
For example, an address or property description may be recorded incorrectly, says Diane Cipa, title agent and general manager at The Closing Specialists, a title insurance company in Ligonier, Pa. Recently, Cipa saw a deed in which one lot of a two-lot parcel was omitted. Buyers who paid for two lots got title to only one, a potentially serious problem if they want to sell. An error like this may be covered by an escrow agent's insurance, but if it is discovered years later, as many errors are, Cipa says, it could be costly or too late to correct.
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John Layman, a Phoenix, Ariz., homeowner, recalls vividly how he and his wife, Kim, found an error in their mortgage papers when they refinanced in 2009. During negotiations with their lender, the couple were offered one chance to claim a lower interest rate if rates fell during their lock period. Rates did fall and they seized the opportunity, negotiating the rate to 5%, down from the 5.125% they'd initially been offered.
Fast forward to their closing conference – "such an overwhelming process, looking at all that paperwork, you just go in and want it over," as Layman recalls. Assuming that their new rate was locked in place, the Laymans sat down to sign "this 20 or 25 pounds of paperwork."
Kim Layman, the hero in this story, took her time, slowly scrutinizing every word on every page. "Suddenly," he says, "she was like, 'What is this? This isn't what we were guaranteed.'" Some of the loan papers showed their new interest rate at 5%. But other documents listed it, incorrectly, at 5.125%.
The couple stopped the conference and asked for a fresh set of corrected mortgage papers. It took a few more hours, but the lender, courteous and professional, produced the documents and the sale proceeded.
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The error, or whatever it was, would have cost them $20 a month -- $7,200 over the 30-year life of the mortgage. "It could have been someone doing something shady to get that extra money or it could have been some kind of weird error," John Layman says. "We'll never know."
The average mortgage-closing package includes about 100 pages of documents, says Richard Booth, a certified mortgage banker with America's First Funding Group in Neptune, N.J. He has seen a large number of mortgage documents in his work performing quality-control audits for lenders on samples of their foreclosed mortgages.
"You had sometimes misspelled names, dates that were not correct, property identifiers that were not accurate," Booth says. In the past few years, banks have laid off thousands of mortgage staffers, including many of the most experienced, Booth says. A subsequent refinance boom is putting the mortgage system "under great stress."
How you can protect yourself:
1. Request your loan package early. Ask your lender to give you a copy of your loan documents one or two days before your closing so you can review them. Make your request a week or two in advance.
2. Take your time. Closing day, with all the mortgage papers, escrow papers, title insurance, tax and other documents, can seem bewildering. Don't feel pressured. Read every document slowly, carefully and thoroughly, paying extra attention to the HUD1 and Truth in Lending statements.
3. Ask questions. Ask for help with words, terms or conditions you don't understand. "Most of the verbiage is boilerplate and cannot be changed, but you can correct errors," Booth says. If you believe you see an error, point it out, respectfully, and get it fixed to your satisfaction, not explained away, regardless how long it takes.
4. Get an attorney. You'll probably understand the mortgage documents if you read them carefully. But if you're uncomfortable, hire a real-estate attorney. The few hundred dollars spent are a drop in the bucket next to the hundreds of thousands of dollars at stake.
5. Ensure that a lender's rep attends your closing. Your loan officer not only can answer your questions but will be the only one with authority to make corrections.
Now and then a loan officer or real-estate agent, or both, withholds information or uses incorrect data on closing documents to help a sale go through. The gesture may seem innocent or helpful, but it's fraud.
Cipa saw just such a situation in her shop recently. A home sale was jeopardized when a pre-sale inspection revealed problems with the house. The buyer wanted the repairs made before purchasing. The seller agreed to pay for the improvements.
What's wrong with that, you ask? Lending regulations cap how much money a seller can give a buyer. This seller, having already paid the buyer's closing costs, was at the limit. The loan officer and real-estate agent, perhaps eager to see the sale go through, incorrectly omitted the repair costs from the official record.
Fraud by loan officers and closing professionals is blamed for helping launch the recent foreclosure crisis. Sketchy loans that let borrowers get a home with little or no investment are more likely to fail, Cipa says. If you don’t really have the money to buy the home you want, back away and make a purchase that you can afford.
CoreLogic, which sells fraud-protection tools to the mortgage industry, says its investigations show that despite improvements, last year $7.4 billion in mortgage loans were tainted by fraud during "origination," the application and loan-closing phase.
Nevertheless, fraud is the exception, says Wayne Stanley, spokesman for the American Land Title Association, a professional organization. "Our value is making sure consumers own precisely what they have purchased and agreed to. While we cannot prevent it completely, land title professionals go to great lengths to avoid fraudulent titles."