Mortgage scams and
not-so-ethical lenders have been in the news
a lot recently. Home buyers need to protect themselves from predatory lenders.
One of the keys to successfully purchasing a home and obtaining a good deal is getting an affordable home loan with fair terms and reasonable costs. Unfortunately, home buyers need to be aware that some loans are not in their best interest. When loans hurt instead of help, those loans can quickly lead to devastating problems, such as foreclosure and even bankruptcy.
The Center for Responsible Lending provides consumers with the following warning signs that they are dealing with potentially predatory loan.
Sounds too easy. “Guaranteed approval” or “no income verification” regardless of borrower’s current employment, credit history, and assets. These claims indicate the lender doesn’t care about whether you can afford to make the payments over the long haul.
Excessive fees. Higher lender and/or mortgage broker fees than are typical in your market. Because these costs can be financed as part of the loan, they are easy to disguise or downplayed. On competitive loans, fees are negotiable. It is common for home buyers to pay only one percent of the loan amount for prime loans. By contrast, a typical predatory loan may cost five percent or more.
Large future costs. High-risk adjustable rate mortgages where the payment rises a lot after a short introductory period are seldom appropriate for families who already have had problems repaying other loans. Home buyers also should avoid a large single “balloon” payment (a lump sum due at the end of the loan’s term).
lender deliberately delays closing so the commitment on a reasonably-priced
Over-valued property. Inflated appraisals that allow excessive fees to be included in the loan and result in the borrower owing more to the bank than the home is worth.
Barriers to refinancing. Prepayment penalties that make it hard for a borrower to refinance in order to pay off a high-cost loan by taking advantage of a low-cost loan.
No down payment loans. These loans may be split into two mortgages, with one having a much higher cost. Home buyers should be sure they can afford the payments. [BLOGGER'S NOTE: No-money-down loans are increasingly popular and help a lot of first-time home buyers purchase a home. What's important is that you speak with a real estate broker you trust to make sure the lender isn't taking advantage of the situation.]
Unethical document management. An ethical lender or broker will always require you to sign key loan papers, and they will never ask you to sign a document dated before the date you sign it.
Although most predatory lending occurs in the sub-prime (loans for individuals with less than ideal credit histories) mortgage loan market, I see people with good jobs and good credit scores being quoted lousy interest rates and and excessive closing costs. I always encourage my clients to run whatever their mortgage broker tells them by me.
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The Federal Reserve provides information on looking for the best loan.