4 Signs of Predatory Lending

Predatory lending occurs when a lender attempts to get you in a loan that costs more than it should, has more restrictive terms than it should, is unnecessary and/or benefits the lender more than you. Watch for these four signs of predatory lending and avoid getting caught up in a bad deal.

Pressure

If you are being pressured during any phase of the loan process, beware. In particular look for pressure to:

  • Use a particular vendor or lender. It could be a sign of a kickback deal between the lender and whoever is referring you.

  • Be less than completely honest on your application. You qualify for a loan based on your credit score and your financial ability to pay. Avoid any lender who encourages you to falsify or misrepresent your income to get you in a loan you would otherwise not qualify for.

  • Leave blanks in your application. If a lender promises to fill in information for you after you sign a loan, don't sign it.

  • Accept more loan than you are comfortable with. Your total monthly debt payments should not be more than 45 percent of your pre-tax pay. Do not trust a lender who tries to push you past that threshold.

  • Purchase credit insurance, you are not required to. This is different than Private Mortgage Insurance, which a lender can require you to have if you have less than 20 percent equity in a home.

Multiple Refinances

Refinancing a mortgage is costly in the short term but, when done prudently, can save you money over the life of your loan. Because of the costs associated with closing a refinance mortgage, you need to get a lower interest rate and lower monthly payments and be in the home long enough to for those lower payments to recoup the closing costs.

Predatory lending is when a lender pushes you to refinance too soon or too often. That lender is hoping to make money off fees and is not looking out for your best interest.

Manipulating the Interest Rate

A lender who tries to push you into an unnecessarily high interest rate is practicing predatory lending. Local mortgage rates are available on line and in newspapers. Be particularly aware if the lender claims you only will qualify for the loan at that high rate and must sign now to get it. Shop around.

An Adjustable Rate Mortgage, or ARM, is a legitimate lending tool where a low initial rate rises after a defined period to market rates or an agreed rate. In predatory lending, some lenders will quote one rate but a higher rate will appear on the loan documents. It's important to know what you agree to sign and then ensure that is what actually appears on the final documents.

Hidden, Unexpected or Unnecessary Costs

If you get to closing and the costs are higher than were quoted to you or unexpected charges show up, don't sign the documents. Total costs shouldn't exceed 5 percent of the loan amount. 

 


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