When looking for a home loan, being aware of predatory lending practises can save you thousands of dollars. These are situations in which you pay too much for your loan or are forced to buy services you don't really need. You can protect yourself from predatory lending if you know what to look for. The Center for Responsible Lending has a list of seven specific warning signs that mortgage applicants should be aware of.
The first red flag is if the points and loan origination fees are too high. Since these fees are often built into the loan, they are easy to hide. Most competitive lenders charge 1 percent or less of the loan amount, but predatory lenders often charge 5 percent or more, which can add up to thousands of dollars over the course of a home mortgage.
The second sign is a high fee for paying off the loan early. There doesn't have to be a fee for paying off a mortgage loan early. In fact, this kind of penalty is only put on about 2% of loans from competitive lenders. But about 80% of predatory lenders build them into the loans they give. Since nonprime borrowers often want to refinance their homes when their credit gets better so they can get lower loans, a stiff prepayment penalty, which can be as much as six months of interest, can make a big profit when the loan is refinanced.
Another red flag is if a broker gets a kickback from a lender. This happens when a real estate broker sends borrowers to a lender at a higher interest rate than the normal rate. The lender then pays the difference back to the broker in the form of a "yield spread premium." This can add a lot of money to your mortgage payments.
The fourth sign is loan flipping, which means that the borrower has to refinance the loan, often more than once, over the course of the mortgage. The fees can be expensive, and their only purpose is to help the lender make more money. They can also lower your equity and make your monthly payments more expensive.
Another red flag is being told that you have to buy extra services, like credit life insurance, in order to get a loan. Most of the time, you don't need these products, and they can also add thousands of dollars to your mortgage payments.
The sixth thing to look out for is mandatory arbitration. This means that if you have a problem with the loan in the future, you will have to settle it through arbitration instead of going to court. This can severely limit your rights, and sometimes you may have to go to the lender's home office, which could be thousands of miles away.
The last red flag is if you are steered toward a less desirable type of mortgage even though it seems like you could qualify for a better loan. Fannie Mae thinks that almost half of the people who took out nonprime loans could have gotten better loans.
Learn to spot the seven warning signs of predatory loan practises so you don't become a victim.
Copywritten by (c) 2006 Fisher, Jeanette J.
