If you’re shopping for a home loan, you can save thousands of dollars by being aware of predatory lending practices, in which you’re charged too much for your loan or are forced to buy services you don’t really need. You can protect yourself by learning to recognize the signs of predatory lending. The Center for Responsible Lending lists seven specific warning signs that consumers should be aware of when applying for a mortgage.
The first warning sign is excessive points and loan origination fees. Since these fees are often financed as part of the loan, it’s easy to hide them. Competitive lenders typically charge 1% or less of the loan amount, but predatory lenders often charge 5% or more, which can add up to thousands of dollars over the course of a home mortgage.
The second sign is a high prepayment penalty. Mortgages don’t have to contain a penalty for paying off a loan early. In fact, only about 2% of loans from competitive lenders include such a penalty. However, some 80% of predatory lenders build them into their loans. Since nonprime borrowers are often motivated to refinance their homes with lower loans once their credit improves, a stiff prepayment penalty–sometimes as much as six months of interest–can generate a substantial windfall when the loan is refinanced.
Another warning sign is if a broker gets a kickback from a lender, in which a real estate broker delivers borrowers to a lender at a higher interest rate than the normally accepted rate. The lender then kicks back a “yield spread premium,” paying the difference back to the broker. This can add thousands to your overall mortgage premiums.
Loan flipping is the fourth sign, in which the borrower is required to refinance the loan, often several times, over the course of the mortgage. The fees can be hefty, and are purely meant to add to the lender’s bottom line. They can also reduce equity and increase monthly payments.
Another warning sign is when you’re told that buying extra services, such as credit life insurance, is mandatory for loan approval. These products are often unnecessary, and can also add thousands of dollars to your overall mortgage payments.
The sixth sign to watch for is mandatory arbitration, in which you’re told that any future dispute over the loan will need to be settled through arbitration, and not through the court. This can severely limit your rights, and sometimes you can be required to appear personally in the lender’s home offices, which could be thousands of miles away.
The final warning sign is if you find yourself being steered toward a less desirable type of mortgage, even if it appears as if you could qualify for a more favorable loan. Fannie Mae estimates than nearly half of nonprime borrowers could have qualified for better loans.
To avoid being a victim of predatory loan practices, learn to recognize the seven warning signs.