Beware of Predatory Loans
For most families, buying a home is
the biggest and smartest purchase they ever make. One os the keys to
success 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, they can quickly lead to foreclosure and even bankruptcy.
is no single definition of predatory lending, because the term covers a
wide range of abusive practices. Some practices 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 tactics.
can provide information about predatory lending, refer clients to
reputable housing counseling organizations, and encourage families to
make informed decisions about how to finance their homes.
lenders play a vital role in helping families achieve homeownership,
but consumers need to make sure they are not dealing with a predatory
lender. Some unscrupulous lenders are only interested in taking as
much money as possible, and are not concerned about whether loans are
affordable, sustainable, and truly helpful to homebuyers and homeowners.
Remember the old saying: "If it sounds too good to be true, it probably is!"
Watchout For Predatory Lenders!
Here are some of the warning signs:
too easy - "Guaranteed approval" or "no income verification" regardless
of homeowners current employment, credit history, and assets. Those
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 fees can be financed as part of the loan, they are easy
to disguise or downplay. On competitive loans, fees may be negotible.
It is common for home buyers to pay only 1 percent of the loan amount
for prime loans. By contrast, a typical predatory loan may cost 5
percent or more.
Large future costs - High-risk adjustable rate
mortgages where the payment rises a lot after the "teaser rate" period
are seldom appropriate for families who already have had problems
repaying other loans. Home buyers should avoid large single "balloon"
payments (a lump sum due at the end of the loans's term).
Closing delays - The lender delays closing, so your commitment on a reasonably priced loan expires.
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.
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
Unethical document management - Ethical lenders and
brokers always require you to sign key loan papers, and never ask you
to sign a blank document or a document dated before the date you sign.
What Are Some Of The Problems Connected To Predatory Lending?
all predatory lending occurs in the "subprime market", where loans are
sold to people with less than ideal credit histories, such as a short
work history, high debt, and a record of late payments on credit cards
or other debt. Subprime loans have played an improtant role in helping
millions of consumers achieve homeownership, but unfortunately some
lenders abuse their role and take unfair advantage of vulnerable
borrowers. Here are a few examples of problems with predatory loans:
interest rates and fees - Predatory lenders often charge extremely high
interest and fees that are added into the total amount of the loan the
borrower must repay. These lenders charge what they can get away
with, not a fair amount based on the credit history of the borrower.
promises/"bait and switch"- Sometimes home buyers are offered a new
loan or a refinance of an existing loan that seems to meet all of their
needs only to find that interest rates and fees have changed when they
get to the closing table. Agreeing to last-minute changes can cost
thousands of dollars and result in a loan they just can't afford.
that start low and go high - Adjustable rate loans are popular in
today's market, but many that seem to be affordable are likely to have
steep cost increases in the future. Avoid "payment shock" by
considering whether you can pay for the loan both now and in the future.
"flipping" - Too many homeowners are persuaded to refinance their
mortgage, sometimes repeatedly, when there is no real benefit. Even
when a family receives some cash from a refinance, the gains should be
weighed against the costs of excessive fees and a higher loan amount.
Often a borrower has other options, such as obtaining a second mortgage
instead of refinancing the entire existing mortgage.
Some families who receive subprime loans could qualify for a much more
affordable home loan. Predatory lenders use aggressive sales tactics
to steer families into unnecessarily expensive loan products.
Shop For the Lowest Cost Loan
develop relationships of trust with the families they serve, and can
help you avoid predatory loans by encouraging careful shopping. Ask
these important questions:
1. What is my credit score? Can I have a copy of my dredit report?
2. What is the best interest rate today? Do I qualify?
3. What is the term (length) of the loan?
4. What are the loan fees?
What is the total monthly payment? Does this include property taxes
and insurance? If not, how much will I need each month for taxes and
6. Is there an application fee? If so, what is it, and how much is refundable if I don't qualify?
7. Are there any prepayment penalties? If so, what are they and how long do they last?
If The Loan Is An Adjustable Rate Mortgage (ARM), Ask:
1. What is the initial rate?
2. How long will the rate stay in effect?
How is the adjusted rate determined? (Generally, a specified amount -
the margin - is added to a current published rate - the "index".)
4. How often can the rate change?
How much can the rate go up each year and over the life of the loan?
What is the maximum monthly payment you could be required to pay?
Would you be able to afford it?
6. Does the loan set a minimum interest rate?
Do the monthly payments gradually decrease the amount you owe even if
interest rates increase? (With some loans, the amount you still owe
can increase rather than decrease each month - called "negative
8. Does the interest rate increase if your payments are late?
Could you qualify for a loan with the maximum interest rate permitted
under the mortgage? If not, do you anticipate earning more in the
future so you will be able to afford the higher payment?
10. Can the
adjustable rate mortgage loan be converted (changed) to a fixed rate
without refinancing into a new loan? Is there a charge to convert?
National Association of REALTORS - November 2006