We've all heard about the old bait and switch in the automotive industry, but did you know that it is prevalent in the mortgage industry? It is so common I used to hear about it from prospective clients quite often. Here's how it works.
You pick up the phone and call a lender; we'll call the lender Avox for the purposes of this article. A Loan Officer from Avox, Mr. Bill answers the phone. The first thing most people want to know is the interest rate they can get. Mr. Bill knows where interest rates are sitting, and he also is pretty familiar with his competitor's rates. He proceeds to give you a rate that is far below any of his competitors, and even below any rate he could ever deliver on, and he knows this. He also knows that he will not have to give you this rate either; in fact, you'll take whatever he chooses to give you.
By now you're probably thinking, no way. All the way through the loan process Mr. Bill is sticking to his promised rate and he knows he's got you hooked because even if you're shopping around, you will not find a lower rate; he's promised you something far below prime. If you are paying off debt he will encourage you to stop paying those bills because you're paying them off. He will encourage you to take cash out; in case of an emergency. He knows that many people in this position are going to start thinking of all the wonderful things that can buy with that cash out they're getting when the loan closes. He may even suggest you do not make the next mortgage payment; after all, you're paying it off. In this position most people will follow his advice. If you do not that's fine too because pretty soon he will have you over a barrel.
One day, three weeks or more into the loan process, after you have already set a date to sight papers, he will tell you of a problem. Due to unforeseen circumstances, does not matter what, he can no longer give you the promised rate. Instead of that wonderful three percent thirty year fixed, he can only give you a four and a quarter on the thirty year fixed. It's now three days before signing and you've got a problem. If you are like many borrowers, especially non-prime listed individuals, you may have stopped paying on your credit cards thinking they will be paid off. If you do not pay them off now you may even get late payments reflected on your credit report. Most people will not make that next mortgage payment either which may result in a thirty day late on your mortgage. If you were shopping around before you decided to go with Avox Company and Mr. Bill, you may be out of the thirty day window and if you go to another company and have your credit folded you may take another hit.
You now have two choices. You could go to another company and get your credit checked which now reflects a lower score due to a mortgage late, credit card lates, and a hit for pulling your credit again. Maybe now because of the mortgage late you can not qualify for prime. There's a good chance you will have to settle for a much lower rate now than you would have received had you gone to an honest lender in the first place. Maybe you have even committed some of that money you were getting on your cash out refi, and now you're in real trouble. What choice do you have? Starting over again and resetting the thirty day to close clock again is probably not an option now. This whole scenario may surprise you, but I used to hear it consistently from prospective clients. I can not stress this enough; it is common practice. Most people in these circumstances stick with the loan anyway, they are so anxious to close and get the money.
Just remember, if it sounds too good to be true, it's too good to be true. Trust your gut when you are talking to a new broker. If he is doing a bait and switch on you, you may not know it until it's too late. If you are paying off debt, make those monthly payments. If a mortgage payment is due half way into the process, pay it. You'll get it reimbursed within thirty days of the loan closing. At least if you do fall prey to bait and switch you will have an easier time walking away from a crooked broker. Good luck and happy borrowing.