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 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. 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.

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 when buying a home. Because these costs can be financed as part of the loan, they are easy to disguise or downplay. On competitive loans, fees are negotiable.
• 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.
• Homebuyers should 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.
• Overvalued 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 loan.
• No down payment loans: These loans may be split into two mortgages, with one having a much higher cost. Homebuyers 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.

OTHER WAYS HOMEBUYERS CAN PROTECT THEMSELVES FROM PREDATORY LENDERS:

• Check out lenders with the Better Business Bureau, government Web sites or other consumer groups. How long has the lender been in business? Have consumers filed many complaints? Does the lender belong to a trade association with ethics requirements for its members?
• Share predatory lending “horror” stories with regulators, other consumers, counseling groups, housing professionals and the media.
• Make contracts subject to the homebuyer receiving approval from a lender for a fair and affordable loan.
• Avoid unnecessary contract extensions that could cause the lender’s loan commitment to lapse.
• Get educated on the value of your home by asking for a comparative-market analysis.
• Review the HUD-1 closing statement before closing. Upon request, homebuyers have the right to see this information 24 hours before the loan closing.