Shopping for a Mortgage?
DO
YOUR
HOMEWORK
FIRST
How to Avoid
Predatory Lending
Remember the old saying:
“If it sounds too good
to be true, it probably is!”
BEWARE OF
PREDATORY LOANS!
For most families, buying a home is the biggest and smartest
purchase they ever make. One of 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.
There 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 sales tactics.
This article will help consumers learn about the risks of predatory
loans and how to avoid them. REALTORS®
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.
Responsible 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 home buyers and homeowners.
WHAT ARE
SOME OF THE PROBLEMS CONNECTED TO PREDATORY LENDING??
Nearly 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 important
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:
High 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.
Broken 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.
Loans 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.
Loan “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.
Steering.
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
REALTORS®
develop relationships of trust with the families they serve, and can
help you avoid predatory loans by encouraging careful shopping. Ask
these important questions:
•
What is my credit score? Can I have a copy of my credit report?
•
What is the best interest rate today? Do I qualify?
•
Is the loan’s interest rate fixed or adjustable?
•
What is the term (length) of the loan?
•
What are the
total
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 insurance?
•
Is there an application fee? If so, what is it, and how much is
refundable if I don’t qualify?
•
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:
•
What is the initial rate?
•
How long will that rate stay in effect?
•
How is the adjusted interest rate determined? (Generally, a
specified amount—the “margin”—is added to a current published
rate—the “index.”)
•
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?
•
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
amortization.”)
•
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?
•
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?
OTHER
SOLUTIONS REALTORS®
AND
HOME BUYERS CAN USE TO AVOID PREDATORY LENDERS
•
Check out lenders with the Better Business Bureau, government
websites, 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?
•
Refuse to participate in transactions that may be fraudulent.
•
Share predatory lending “horror” stories with regulators, other
consumers, REALTORS®,
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 your REALTOR®
for a comparative market analysis.
•
Review the HUD-1 closing statement
before
closing. Upon request, home buyers have the right to see this
information 24 hours before the loan closing.
•
Report possible violations to appropriate federal, state and local
officials.
POSSIBLE
WARNING SIGNS OF A PREDATORY LOAN
•
Sounds too easy.
“Guaranteed approval” or “no income verification” regardless of
borrower’s current employment, credit history, and assets. These
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 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 where the payment rises a lot
after a short introductory period are seldom appropriate for
families who already have had problems repaying other loans. Home
buyers also should avoid a large single “balloon” payment (a lump
sum due at the end of the loan’s term).
•
Closing delays.
The lender deliberately delays closing so the commitment on a
reasonably-priced loan expires.
•
Over-valued 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.
•
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.
This information provided Courtesy of:
National Association of REALTORS®
500 New Jersey Avenue, NW
Washington, DC 20001
Center for Responsible Lending
910 17th Street NW, Suite 500
Washington, DC 20006
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