What to watch out for when you're shopping for a home loan.
Sign 1 - Big Fees
"Points" or "discount points" are the lender's fee for making the loan. Generally, a charge of three points—3% or less of the loan amount—is a good deal, including such necessities as an appraisal and title insurance. Get your credit score in advance and research typical fees in your area.
Sign 2 - Penalties For Paying Off Early
A "prepayment penalty" requires you to pay a steep fee before refinancing. The penalty period can last several years and cost thousands of dollars.
Sign 3 - Inflated Interest Rates From Brokers
Brokers can make more money if they boost the interest rate above the lender's actual charge. Ask if your broker will be paid a "yield-spread premium" – a financial reward lenders pay for inflated interest rates.
Sign 4 - Steering And Targeting
Predatory lenders often target senior citizens and people of color to place them in unnecessarily expensive loans. Don't respond to ads that say bad credit doesn't matter, and be especially wary of lenders or brokers who contact you or those who try to rush you into decisions.
Sign 5 - Adjustable Interest Rates That "Explode"
Beware of adjustable-rate loans that can rise significantly, especially if it isn't possible for the interest rate to go lower, only higher. Make sure you understand the worst-case scenario for future payments. And don't count on a future refinance to rescue you from an unaffordable loan.
Sign 6 - Promises To Fix Problems With Future Refinances
Predatory lenders are notorious for selling bad deals by promising that they will refinance the loan later. If a loan stretches you too much now or in the future, just say no.
Sign 7 - Repeated Refinances That Drain You
Repeated refinances—"flipping"—mean you lose more money in points and fees every time. Don't be tempted by a bit of cash when you might end up owing even more on your house, losing valuable equity, and paying more than necessary.
Sign 8 - Not Counting Taxes And Insurance
Know in advance whether your monthly mortgage payment will include the costs of property taxes and insurance (i.e., whether the lender has established an escrow account for these costs). Unscrupulous lenders make house payments seem artificially low by not counting all costs—which you will be required to pay.
FAQs
Warning Signs of Predatory Lending
- High interest rate or rate is not disclosed at all.
- Credit insurance is required with the whole premium paid in advance. ...
- There are high pre-payment penalties. ...
- Non-amortizing loans. ...
- The lender uses aggressive sales tactics. ...
- There are high fees associated with the loan.
What is it? Predatory mortgage lending, whether undertaken by creditors, brokers, or even home improvement contractors, involves engaging in deception or fraud, manipulating the borrower through aggressive sales tactics, or taking unfair advantage of a borrower's lack of understanding about loan terms.
What is the red flag for predatory lending? ›
Extremely high fees
Predator loans can also have very high fees compared to those from reputable lenders. Some examples of fees could be document-preparation fees, closing costs, title search fees, credit report fees, appraisal fees, application fees, and origination fees.
How do you know if you are a victim of predatory lending? ›
Look for high or hidden fees.
High interest rates and other fees are common tactics used to take advantage of borrowers. Be sure to read through the terms and conditions and look for sections that list the fees, penalties, and payment details.
How to prove predatory lending? ›
In California, all you have to show to prove that predatory lending took place is that your lender had reason to believe that you could not afford your loan amount. You can use a violation of predatory lending law as grounds to rescind your loan or as a formidable defense against foreclosure.
Who are the most common victims of predatory lending? ›
Predatory lending is frequently directed to those with challenges making informed decisions, specifically older adults, families with limited means, minorities, immigrants, individuals with bad or no credit, and individuals with disabilities.
What are the tactics used by predatory lenders? ›
Consumers can be lured into dealing with predatory lenders by aggressive mail, phone, TV, and even door-to-door sales tactics. Their advertisem*nts promise lower monthly payments as a way out of debt, but don't tell potential borrowers that they will be paying more and longer.
Who do predatory lenders target? ›
Predatory lending is any lending practice that uses deceptive or unethical means to convince you to accept a loan under unfair terms or to accept a loan that you don't actually need. Predatory lenders often target minorities, the elderly, the less educated, and the poor.
Who is most susceptible to a predatory lender? ›
Final answer: The most susceptible individuals to predatory lenders are those who have low-income, poor credit history, and lack financial literacy.
What type of homeowner is a frequent target of predatory lending? ›
Homeowners in certain communities, particularly the elderly and minorities, are especially likely to be targets of predatory lending but almost anyone can fall prey to abusive lending practices.
Make sure the lender and broker you are dealing with are licensed by the State Banking Department. You may contact the Banking Department at (800) 522-3330. Watch out for “hidden” terms, such as prepayments and balloon payments. Be wary of loans offered through door-to-door sales or telemarketing solicitations.
What are some of the warning signs to watch out for a possible predatory lender give at least 3 and explain why they are red flags? ›
8 Signs of Predatory Mortgage Lending
- Sign 1 - Big Fees. ...
- Sign 2 - Penalties For Paying Off Early. ...
- Sign 3 - Inflated Interest Rates From Brokers. ...
- Sign 4 - Steering And Targeting. ...
- Sign 5 - Adjustable Interest Rates That "Explode" ...
- Sign 6 - Promises To Fix Problems With Future Refinances.
These are some factors to watch out for when going through the process.
- High interest rates. ...
- Excessive or hidden fees. ...
- Prepayment penalty. ...
- Balloon payments. ...
- Loan packing. ...
- Loan flipping. ...
- Negative amortization. ...
- No credit check.
Predatory lending practices typically involve one or more of the following: - Falsifying income/asset and other documentation. - Basing an unaffordable loan on the applicant's assets rather than his or her ability to repay the loan. - Sometimes the borrower also pays a higher interest rate than with the original loan.
What to watch out for when you're shopping for a home loan.