Predatory lending is an unfair practice that decreases a borrower’s ability to repay debt and benefits the lender. Predatory lending tactics can involve high interest rate loans, hidden and excessive fees, undisclosed terms and more.
Predatory lenders typically target vulnerable borrowers and trap them in debt cycles that can lead to foreclosure and even bankruptcy.
The first step in detecting and avoiding predatory loans is to identify the red flags that can arise when trying to buy a home.
Before applying for a mortgage, research current mortgage interest rates. If your credit is fair, you may be cited as something below average. If it needs improvement, you can get a slightly higher rate. If a lender offers something too high, that’s a red flag and you should look elsewhere.
Andrew Pizor, a lawyer at the National Consumer Law Center, recommends that homebuyers take a close look at the loan estimate from at least three different lenders. This three-page document shows the estimated interest rate, monthly payment, and total closing costs for a loan.
“This is where you will find discrepancies,” Pizor says. “If one is irrelevant, be suspicious or ask why. “
Pizor notes that a high rate isn’t automatically a predatory form of lending – it may be higher due to your creditworthiness – but an unusually high rate is certainly a red flag.
Buying a home involves many expenses beyond your mortgage, including a variety of fees and closing costs. Here are some examples.
Appraisal Fee: Paid to a licensed professional who inspects a home to determine its value before a lender makes a mortgage offer. Bankrate estimates that these fees range from $ 300 to $ 450.
Credit Report Fee: Charged by the lender to retrieve your credit report. It’s usually $ 25 or more per person.
Title Search Fee: Passed to someone hired by the lender to search local property records to analyze the title of the home and make sure there are no property or lien issues . It usually hovers around $ 450, but it doesn’t apply to a new home.
Original Fee: Fee charged to start the loan process. Although many lenders do not charge it, it can be as high as $ 125.
File fees: Charged by some lenders to process your file.
While simply charging these fees is not an example of predatory lending in most cases, lenders may intentionally overcharge them. This is when it becomes predatory, and lenders can unfairly pocket thousands of fees or build them into your loan, inflating your debt.
Predatory lenders could also charge fees that serve no purpose other than to make consumers more money. Pizor suggests that you pay attention to vague sounding items such as “administration fees” and ask what they are for.
Prepayment penalties are fees that lenders charge when you pay off your mortgage before the end of its term, which is known as the maturity period. So, if you get a deal and decide to pay off your 30-year mortgage after the second year, you may have to pay some unexpected fees. Learn about prepayment penalties directly or avoid loans with prepayment penalties.
Lump sum payments are fees that appear later in the term of the loan. In this case, you start off with a low interest, low payment loan, but you might not know the fees will start to rise later in life. Sometimes these increases can get out of hand. Borrowers who cannot continue to make these payments can lose their home to foreclosure. In some cases, the predatory lender will offer to refinance the loan into a new mortgage with a fixed interest rate, but the process would involve additional fees pocketed by the lender, which would put you in the situation in the first place.
Loan reversal occurs when a lender refinances your loan into a loan with a higher interest rate and a longer term. While refinancing can be legitimate and beneficial for many borrowers, the goal of refinancing is to pay less in the long run. A predatory lender could do the opposite. Ron Wynn, a licensed real estate broker in Los Angeles, warns lenders who recommend refinancing multiple times.
Unless you’ve voluntarily taken out a loan that allows you to pay the interest first, your monthly payment should reduce the interest and some of the principal balance on your loan. A predatory lender benefits from negative amortization, or when your monthly payment is too small to cover part of the interest, so the interest continues to accumulate and you end up paying a lot more in the long run. Your lender can provide you with graphs that tell you how much interest and principal balance you are repaying over the life of your loan.
If a lender promises to extend an offer without checking your credit history, stay away. Credit checks are done to assess your ability to pay off your mortgage on reasonable terms. A lender who avoids this step may offer you a loan that you cannot afford and lock you into a cycle of debt that can lead to foreclosure.