How to Spot Predatory Mortgage Loans and Lenders
Predatory mortgage lending can be one of the most worrisome of all types of situations for a first time homebuyer. The question you have to ask is whether this loan the best loan for me and do I know everything I need to know about it before I agree to it? In the last few years, there have been many instances where potential homebuyers, or even those refinancing current loans, have fallen victim to predatory scams. You can avoid this, but to do so, you need to know what these loans are and how to avoid them.
What Is a Predatory Mortgage?
Predatory lenders and loans target a specific group of people, though they can occur in any situation. Often, these homeowners do not know what to look for, often lower income individuals and those who may be vulnerable financially. In short, in this type of loan, the homeowner or the borrower is never able really to benefit from the loan. These are loans individuals barely qualify for and that never really provide them with the ability to own a home affordably.
There are numerous things to look for when you apply for a loan. The following are some circumstances that can help you to identify when predatory lending conditions exist.
Costly Loans with Good Credit
The loan is costly and you have good credit. The lender may convince you that the loan’s costs and fees are acceptable, including high interest rates, high closing costs or other fees. They want you to believe that this is the least expensive loan out there. The best way to avoid this scenario is simply to shop around. Know what the costs are really like by comparing offers from several lenders.
You sign a mandatory arbitration agreement. This means that you are unable to fight for your rights or for various clauses in the paperwork and contract down the road. You should not have to sign this type of agreement. If the lender requires it, find out why and what your other options are. You should have the right to have representation and to fight claims you do not think are fair down the road.
Flipping the Loan
The lender is looking to flip your loan. This is one of the predatory conditions you may find if you currently own a home and are approached to refinance your loan. Every time you refinance, you end up paying higher and higher fees through closing costs. Any equity you have is eaten up quickly. You may find yourself in a variable rate loan that does not adjust downward. Even worse, the lender may trick you into the situation by promising very low interest rates, the ability to pay off your debt through the process or even other benefits you will receive by refinancing. While these things do happen, you end up paying for them through expenses in your mortgage.
Incentives to Mortgage Brokers
In all situations, mortgage brokers are able to earn incentives for getting you into one loan or another. However, in some situations, they may not be completely honest. Your mortgage broker should want you to get into the lowest rate possible. If he or she does not tell you about a lower rate offer and you ask, you end up paying too much. The lender may be giving that individual a bigger paycheck if you agree to a higher rate of interest. To avoid this, be sure that you compare loan offers. Know that your lender is working with your best interests
Prepayment Penalties in Place
If you win the lottery the day after you sign the contract, are there any penalties you have to pay to pay off your mortgage? Even if you do not think that is going to happen, you may wish to refinance your loan in the future or maybe even pay it off sooner. Find out if the lender puts a prepayment penalty in place. Some will do this for the short term, such as three years from the refinance rate, but longer-term penalties are not a good thing. Ask the lender to remove it, or look for another lender.
Add On Products
Another way that mortgage brokers can prey on you is to tell you that you need to pay for additional add on features or products. This may include some forms of insurance (though some loans do require this) or other features that they may not tell you about. If you see any cost on your closing costs that you did not know about, ask about it. Find out what it really is.
How to Choose the Right Lender
To avoid predatory loans, consider the following:
- Does the lender check out with the Better Business Bureau?
- Does the lender explain in detail all of the fees you will pay?
- Does the lender insist that you cannot qualify for a lower rate loan even if another lender says you do?
- Is there are time limit on when you can accept the loan? If the lender tells you, you have to sign right away, run.
Most importantly, have you compared numerous loans to determine which one is right for you? The more you are in the know, the better.
Calculate Your Cost
Closing costs are usually the hidden cost that consumers do not understand and the perfect place for sneaky lenders to put added funds in. Estimate three to seven percent of the loan’s closing value to be closing costs. With mortgages, you can also use various mortgage calculators online to determine what you can expect to pay, based on the specific type of loan you need and want.
Predatory lenders are out there, and there are more of them than ever. It is up to you to find a loan that works for your needs and to check out the lender. By doing this can help to protect you in the long term and help you to get a loan that is right for you.