After the housing crisis, predatory mortgage loans saw a severe decline. Now that the industry is coming back, we are seeing a resurgence of the issue. Before you get caught in the trap, know the signs and what you can do.
What are Predatory Mortgage Loans?
You will know a predatory mortgage loan when you see one. Its common characteristics include:
- Excessively high interest rates
- Excessively high costs
They are not loans you seek out yourself. Instead, brokers and home improvement contractors solicit you. Oftentimes, the borrowers are not even in the market for a mortgage. The targeted borrowers are often those with bad credit. However, they often target the elderly and those with low incomes as well.
Signs of Predatory Mortgage Loans
In order of importance, we will discuss the signs of predatory mortgages:
- Large fees – A good rule of thumb is to pay no more than 3% of your loan amount in closing costs. Lenders who charge more may use high-pressure tactics, telling you that your credit history warrants the higher costs. Question any fees totaling more than 3%.
- Prepayment penalties – Excessive prepayment penalty terms or costs signify predatory lending. Generally, loans can have a prepayment penalty for the first 3 years only. For the first 2 years, the maximum allowed is 2% of the loan amount. The third year, you can only pay 1% of the loan amount. Any fees beyond this should make you leery.
- Adjustable interest rates – Some perfectly acceptable programs have adjustable interest rates. Predatory loans, however, have unfair adjustable rates. For example, they may never be able to decrease, only increase. Always know the worst possible interest rate before taking a loan.
- Encouraging refinance flipping – Predatory lenders encourage borrowers to refinance soon after they just refinanced their home. They promise them big savings or cash in their pocket. In reality, all they do is drain the borrower of money. Each refinance costs points and fees, which go into the broker’s pocket.
How you Can Avoid Becoming a Statistic
Nothing is foolproof, but knowing the common ways to avoid predatory lending can help keep you safe.
- Don’t fall for guaranteed approval – Not one loan officer can guarantee you will receive approval for a loan without going through underwriting. Be wary of any loan officer that promises you the world or tells you to not worry about your credit issues.
- Do not let someone talk you into refinancing – You should only deal with loan officers/brokers that you contacted. Solicitation for your business is usually sign of predatory lending. This is especially true if borrowers harass you consistently and won’t take “no” for an answer.
- Shop around with several lenders – Do not take one lenders word for what you qualify to receive. Instead, shop around yourself and contact at least three other banks. This will allow you to compare the offers. If one stands out as much different than the others, it’s best to avoid it.
- Ask a lot of questions – Ask for explanation of any fees, terms, or conditions. If the lender doesn’t have the answer or skirts around the issue, move on. They should always provide you with full details in writing regarding your loan term, fees, and overall costs.
- Do not take verbal agreements – A lender that promises you the world verbally, but nothing in writing shouldn’t be trusted. You have a legal right to have everything in writing. The lender must send you a Loan Estimate within 3 days of applying for the loan. If they won’t send one, do not use them.
What if you are a Victim of Predatory Mortgage Lending?
Unfortunately, people still become victims of predatory mortgage lending. If you are one of them, act fast and do one of the following:
- Rescind the loan – You have three business days after closing on a refinance to cancel your loan. Exercise your right.
- Sue the lender – If your rights were violated and you can’t cancel the loan, consult an attorney.
- Refinance the loan – If you qualify to refinance out of the predatory loan, talk to a reputable lender to determine your options.
Predatory mortgage loans still occur and usually to the most vulnerable people. Always ask for advice from others when taking out a loan. Using reviews from others and professional guidance, you should be able to avoid the perils of predatory loans.