Predatory lending means imposing unfair loan terms on borrowers. In most cases, borrowers are expected to pay high fees and interest rates thereby reducing their credit score and stripping them of borrower equity, all to the lender’s benefit.
Predatory lenders employ aggressive and manipulative sales tactics to exploit borrowers because they don’t know how the mortgage market works. Predatory lenders induce and entice a borrower to take out loans they cannot comfortably pay back.
How do you recognize a predatory mortgage lender? What are the signs to look out for? Continue reading to learn more:
Signs of a predatory mortgage lender
Below are some of the signs that tell you a mortgage lender is out to exploit you:
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Penalties For Paying Off Early
A “prepayment penalty” requires that you pay a high fee before refinancing. The penalty period can extend for years and will cost you thousands of dollars.
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Inflated interest rates from brokers
Brokers make more profits if they increase the interest rate above what the lender will normally charge. Ask your broker if they will be paid a “yield-spread premium” – this is a financial reward lenders pay for increasing interest rates.
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Steering And Targeting
Predatory lenders have a target audience. They usually go for senior citizens and people of color so they can easily manipulate them and place them in undue expensive loans. When you notice this, don’t listen to them when they say bad credit isn’t important. Also, stay clear of lenders or brokers who contact you and try to force you into making unhealthy decisions.
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Adjustable Interest Rates That “Explode”
Take cognizance of adjustable-rate loans that can increase significantly, especially when there’s no chance for the interest rate to go lower, only higher. Ensure you understand how future payment works and how to prepare for the worst. Also, don’t rely on a future refinance to save you from an unaffordable loan.
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Promises To Fix Problems With Future Refinances
Predatory lenders are in the habit of selling bad deals by making promises of future refinance. If a loan spreads out for too long either now or in the future, it’s safe to reject such loans.
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Repeated Refinances That Drain You
Repeated refinances implies that you lose more money in fees and points regularly. Predatory lenders might attempt to lure you with some cash but it’s a ploy to make you keep on paying fees. You might end up owing more on your house and losing valuable equity.
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Not Counting Taxes And Insurance
Know beforehand if your monthly mortgage payment will include the costs of insurance and property taxes. Predatory lenders make house payments look ridiculously low by not adding all costs so you’ll be required to pay more in the future.
Conclusion
Predatory lenders have a target audience that consists mainly of vulnerable people. Predatory lenders are different from loan sharks; this practice is mostly carried out by established institutions.
Before choosing any mortgage company to work with, ensure you’re sure of their background and you understand all loan documents before you sign.
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