And the catch is. You often hear rates advertised on TV, radio, or in the newspaper offering unbelievable mortgage loan interest rates, but you wonder if such a rate is possible. You say to yourself, “It has to be. It is a big name bank. They wouldn’t lie about something like that.”
So you go in to apply for the mortgage. A couple days or a week later, the loan officer at the bank calls to congratulate you on your approval. The only thing is the rate is about 1-3% higher than what you applied for. You start to argue with the loan officer that the rate is not what you agreed to. Their answer is, “Well, that is what you are approved for.”
What happened? Some people in the mortgage loan industry call it “bait and switch.” You draw the borrower in with a low interest rate or no closing costs loan, work with the borrower to where they put some money out (usually for an appraisal) or they have spent a good amount of the borrower’s time, and then switch the loan to what they really only qualified for in the first place. Can a person advertise these ridiculous offers if you cannot get one? The answer is yes, because there is at least one person out there that would meet the qualifications; even if the qualifications were 800 credit score with less than 50% loan-to-value.
Quick side note… once you pay for the appraisal, you are caught in a real pickle. Even though you paid for the appraisal, it technically belongs to the person who ordered it (the bank, broker, or lender). They hold it over the borrower to keep them with them because they know that it will take another couple days if not a week for a new company to get another appraisal done plus the borrower will have to pay that fee again.
So what can you do about? Do your own homework to see what other banks/lenders/brokers are advertising. We all get our money from the same places, so our rates are all about the same. It is a matter of who has the best overall deal for you in the long run. Mortgage brokers get their rates at wholesale (often lower rates by .125-.5% than what the local bank offers). Banks often offer relationship packages with their mortgages (checking, savings, an increase interest rate bonus on CDs). Smaller companies often have lower costs due to the lower overhead.
The best way to protect yourself is to ask for a copy of the Good Faith Estimate and Truth-In-Lending. These items are required to be given to you within 3 days of signing an application. Also, ask to see a copy of the rate lock once you authorize the lock. By getting these three items, you will have proof that should a “bait and switch” occur that you can file a complaint with the proper governing body that oversees them.