How do I not get taken because of bad credit?

Subprime lending has been a godsend to many, allowing millions of Americans to rebuild their credit and take out home mortgages for which they would otherwise never qualify.

American homeownership has boomed. Unfortunately, they have also left many subprime borrowers vulnerable to a breed of unethical subprime lenders, predatory lenders who profit from excessive rates and fees. In many cases, they even profit from foreclosures of their borrowers.

If you are in the market for a subprime mortgage loan, beware of the following, a list of the most common abusive, "predatory" lending practices:

  1. Steering. Predatory lenders often "steer" borrowers toward unfavorable mortgages. Often, these mortgages are for amounts greater than the borrower can afford or include high-risk terms such as interest-only or balloon payments. Predatory lenders also often steer borrowers into subprime loans when they could have qualified for mainstream loans with significantly better terms. Shop around for the loan that is best suited to your needs and circumstances.
  2. Excessive Fees and Points. Because these are not directly reflected in interest rates, fees and points are easy to disguise. Generally, fees and points charged to close a mortgage should not exceed five percent of the loan, and are usually much less. Predatory lenders often charge five percent and more.
  3. Abusive Prepayment Penalties. When their credit improves, borrowers with high-interest subprime loans have a strong incentive to refinance their loans. Most subprime loans carry a prepayment penalty-that is, a penalty for paying off the loan early. A prepayment penalty in and of itself is not necessarily predatory, however if it is still required more than three years after the date the loan is made and/or costs more than six months' interest it is considered abusive. If the loan carries a prepayment penalty, it must be clearly explained in the loan closing documents.
  4. Unnecessary Products. Predatory lenders may also charge subprime borrowers for the purchase or financing of unnecessary or even non-existent products. For example, you may not want to purchase credit life insurance, which pays off the mortgage if you or your spouse dies, if you already have other life insurance. If you are purchasing additional products from a lender, make sure that you are deriving an actual benefit from those products.
  5. Equity Stripping. Predatory lenders often encourage subprime borrowers to refinance their loans over and over again when there is little or no benefit to doing so. As costs and fees build up in the mortgage loan amount, the equity in the house is "stripped" from the borrower with each refinancing leaving the borrower vulnerable to financial emergencies and potential foreclosure.