It doesn’t cease to amaze me: the fact that so many mortgage lenders blatantly committed out-and-out fraud during the real estate boom. An article Saturday in the New York Times, “Saying Yes, WaMu Built Empire on Shaky Loans” shed light on WaMu’s bad behavior in that regard -- though I don’t imagine WaMu was alone.

“As a supervisor at a Washington Mutual mortgage processing center, John D. Parsons was accustomed to seeing baby sitters claiming salaries worthy of college presidents, and schoolteachers with incomes rivaling stockbrokers’. He rarely questioned them. A real estate frenzy was under way and WaMu, as his bank was known, was all about saying yes.”

Of course, WaMu got its comeuppance -- on the brink of collapse, it was seized by regulators and sold to JPMorgan Chase in September. But what about the borrowers who were misled by shark-like mortgage brokers into unaffordable mortgages, and are now losing their homes as a result? One example of a loan WaMu made to an elderly couple is particularly depressing:

“With a fixed income of about $3,200 a month, the couple needed a fixed-rate loan. But their broker earned a commission of three percentage points by arranging an option ARM for them, and did so by listing their income as $7,000 a month. Soon, their payment jumped from roughly $1,000 a month to about $3,000, causing them to fall behind.”

I’ll leave lamenting what’s happened in the past to others (or other posts, perhaps). What I’d like to do today is offer some tips for borrowers to protect themselves -- and their money and their homes -- when taking out a mortgage. The tips come from my article, “10 Home Finance Mistakes You Can't Afford,” which you can check out at http://myphoenixmls.com/10-finance-mistakes.asp.

Investigate all your options, then lay your choices side-by-side and do the math, making sure to compare worst-case scenarios. Be sure to look at initial interest rates, future interest rates and payments (if different), and the possibility of prepayment penalties.
 

Tip #2: Understand the difference between preapproved, prequalified and a loan commitment

When you are prequalified, the lender is making an educated guess about how much you can borrow based on information you've provided. When you are preapproved, the lender has verified everything you have told him or her and is offering to lend you up to a given amount at current interest rates -- under certain conditions.

Whether prequalified or preapproved, final clearance and a check at closing -- a loan commitment -- are subject to an appraisal satisfactory to the lender, good title, a last-minute credit check and other verifications. When meeting with lenders, always ask how they define each term and what additional steps will be required to actually obtain a loan. 

Excessive credit is almost as bad as no credit or even bad credit. Even if you pay your bills on time, lenders tend to focus just as much on how much credit you have available to you as they do on timeliness. So being up to your ears in car loans and credit cards is a sure way to be turned down for a mortgage. Postpone any major purchases until after you buy your house.
 

Tip #4: Tell the whole truth and nothing but the truth on your loan application

Exaggerating your income on a mortgage application or putting down other untruths can be a federal offense. Lenders rarely prosecute liars, but if they find out later, they can call your loan due and payable.

And don't ever sign your name to a loan application that is not completely filled out, either. Loan officers have been known to stretch the truth to get a client approved, but it's the borrower who ends up paying the price, often in the form of unaffordable monthly loan payments. 

The worst thing you can do is ignore phone calls and letters from your lender when you are behind on your payments. Lenders have many options at their disposal to help keep borrowers from losing their homes to foreclosure. But they can't do anything for you unless they can talk to you about your difficulties. Lenders are the enemy only if you give them no other choice.

 What do you think? What’s been your experience with mortgage lenders? Click on the “Comments” link and join the discussion!