How to Avoid Predatory Lending

For most families, buying a home is the biggest and smartest purchase they ever make. Unfortunately, not all loans are in their best interest.

When loans hurt instead of help, they can quickly lead to foreclosure and even bankruptcy. It's important to learn the warning signs and common problems associated with predatory lending, and to ask the right questions when shopping for low cost loans.

The term, "predatory lending" covers a wide range of abusive practices. Some may be predatory for one borrower but not for another, because everyone's circumstances are different. Predatory lenders often take advantage of first-time homebuyers and others who may be vulnerable to high-pressure sales tactics, so it pays to know how to protect yourself and who can help.

Nearly all predatory lending occurs in the "subprime market," where loans are sold to people with less than ideal credit histories. Subprime loans have played an important role in helping millions of consumers achieve homeownership, but, unfortunately, some lenders abuse their role and take unfair advantage of vulnerable borrowers

Possible warning signs of a predatory loan

It sounds too easy: "Guaranteed approval" or "no income verification" sometimes indicate that the lender doesn't care whether you can afford to make the payments over the long haul.
Excessive fees: Make sure fees are typical of those in your market. Because these costs can be financed as part of the loan, they are easy to disguise or downplay. 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 with payments that rise substantially after a short introductory period are seldom appropriate for families who already have had problems repaying other loans. Home buyers should also avoid a large, single "balloon" payment (a lump sum due at the end of the loan's term).
Closing delays: A lender who deliberately delays the closing may be waiting for the commitment on a reasonably-priced loan to expire.
Over-valued property: Inflated appraisals can allow for excessive fees to be included in the loan, resulting in the borrower owing more to the bank than the home is worth.
Barriers to refinancing: Prepayment penalties can make it hard for borrowers to refinance and take advantage of a lower-cost loans.
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.
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.