How To Protect Yourself From Predatory Lenders

Get Advice.
Home mortgage loans are very complicated, and you need someone with experience who you can trust on your side. Non-profit housing counseling agencies can help you determine your options, evaluate your loan offers, and assist you in getting the best loan possible. Call HUD toll-free at 1-800-569-4287 to find the nearest location.

Don’t get talked into taking out a loan you can’t afford.
It may be hard to believe, but some predatory lenders will encourage you to take a loan even if you don’t have the income to pay it back. They may just want to get their fees and don’t care what happens to you, or they may actually want to foreclose on your house so they can sell it and make money. If you can’t afford the loan, you will lose your home.

You can change your mind. If anything is different at closing - don’t sign.
While you may be threatened with losing the loan, it’s better than losing your house to a predatory lender. Don’t fall for a “bait and switch” in which they promised you a lower rate than what they’re really giving you. Also, with refinance and home equity loans, you have three days after closing to change your mind for any reason, or for no reason at all.

Be careful with debt consolidation.
If you are thinking of consolidating credit cards or a car loan with a refinance or home equity loan, be aware that although it may lower your monthly payments in the short term, you may end up paying much more over time, especially with high fees and extra products like credit insurance rolled into the loan. Also, when you consolidate other bills with your mortgage, you not only lose equity, but you increase the risk of losing your home if you can’t make the payment. If you are having troubles managing your debt, talk to a credit counselor first. To find a legitimate counselor, contact the National Foundation for Credit Counseling, at www.nfcc.org or call 1-800-388-2227.

Get it in writing.
When you apply for a loan, ask for a “Good Faith Estimate” that lists all the fees you will be charged. Ask for copies of documents to read in advance before you have to sign them. And make sure that you receive copies of all documents after you have signed them.

Check your credit report.
Make sure your credit report is accurate and that you understand it. Lenders charge higher interest rates to riskier borrowers, and because they use your credit report to decide how risky they think you’ll be, it is very important to make sure that all the information on your credit report is accurate before applying for a loan. Predatory lenders may also try to tell you that your credit is much worse than it really is. At the National Foundation for Credit Counseling Housing www.nfcc.org or 1-800-388-2227 they can run your credit report, review it with you, help you fix any errors that it may contain, and work with you to improve it.

Always shop around.
Don’t take the first loan you are offered even if they tell you it’s a good deal. Check with several different banks, credit unions, and mortgage companies. Predatory lenders charge much higher interest rates and fees than other lenders. As many as half of all people who receive high interest loans could have qualified for a lower rate. Even if you have credit problems, you should still shop around to get the best loan available. You can also get advice from a housing counselor to evaluate the loan offers you are receiving and to ensure you get the best loan possible.

Don’t sign anything that doesn’t seem right.
Don’t let the lender rush you, even if you’re told “that’s the way it’s done.” Don't sign documents if something seems strange, confusing or different from what you thought you were getting. Look over everything you sign to make sure all your information is correct, including your income, debts, and credit. Don’t sign applications where the lender has made up information about you. Don’t sign blank loan documents or forms with blank spaces “to be filled out later.”

Ignore high-pressure sales tactics.
Beware of offers you receive in the mail, on the phone, or from visitors to your house. If you really need or want a home loan, you should contact the lenders and take your time while considering your options. Stay away from lenders who say that the deal is only good for a limited time or who rush you to sign the papers without letting you read them.

What is the Annual Percentage Rate (APR)?
The APR is one of the most important things to compare between lenders when looking for a loan. It takes into account not only the interest rate, but also the fees that you have to pay to get the loan. Generally, you want to look for the loan with the lowest APR.

Is it a Fixed or Adjustable Interest Rate?
One of the benefits of owning a home is having a stable monthly payment. Adjustable interest rates rob you of that security, especially with predatory loans where the interest rates only adjust one way – up. Make sure you know when and how much the interest rate will increase and what your new monthly payments will be. Find out how high the rate can go and what the monthly payments would be at that rate. Don’t count on a promise that the lender will refinance the loan before your payments increase.

Is it an Interest-Only, Negative Amortization, or Option ARM Loan?
These days many people get put into loans that start with a lower monthly payment, but that have completed terms and for which the monthly payment will definitely go up. With interest only loans, you pay and pay, but none of your payments go to pay off your loan, all of it goes to interest. With interest only loans, your payment will go up significantly after a few years. With Negative Amortization loans, you don’t even pay all the interest that is due. So even though you make your payment every month, the amount you owe on the loan goes up! Option ARMs give you a choice every month of paying less than the interest due, just the interest, or the interest and principal. Even though these choices may have a lower starting payment, your payment will go up and then you will probably want to refinance again, incurring more closing costs.

Will your monthly payment include insurance and taxes?
Make sure you know this information when evaluating loan offers. If the new monthly payment does not includes taxes and insurance, make sure you know how much they will be and whether you can afford to pay them separately.

Is there a Prepayment Penalty?
A prepayment penalty may require you to pay thousands of dollars extra if you refinance or sell the home within the first several years of the loan. Often the penalty is so large that it keeps you trapped in a high interest rate loan. Make sure you know if the loan you are offered has a prepayment penalty, how long it is in effect, and how much it will cost. If there is a chance that you will refinance or sell your house during that time, you should probably get a loan without a prepayment penalty.

What is the total of the closing costs and fees?
Make sure you know all of the closing costs, points, and fees that you are being charged. With refinance and home equity loans, it is common for the closing costs to be financed into the loan so that you pay very little “out of pocket.” While this may be helpful to you, it makes it easier for predatory lenders to hide or lie about how much they are charging. Predatory lenders load up their loans with fees that rob you of thousands of dollars of your equity, increase your total loan amount, and make your monthly payment higher.

How much is the mortgage broker getting paid and who is paying them?
Many predatory loans involve mortgage brokers who instead of trying to find the best loan for you, put you in the loan that makes them the most money. Sometimes a broker will sell you a loan that has a much higher interest rate than you deserve in order for them to get a kickback from the lender, called a “yield spread premium.” This is especially predatory when it is on top of the fees and closing costs that you are paying them.

Is there a Balloon Payment?
Balloon mortgages require that after making all your monthly payments for several years, you must make one big “balloon” payment that is almost as much as your original loan amount. When the balloon payment is due, you must come up with the money, which probably means refinancing and getting a new loan, which means more fees, or else lose your home.