As with any major crisis, scammers and hackers come out in full force. Unfortunately, this doesn’t stop with rioters and looters but online scammers and even seemingly legit companies such as lenders and loan officers. We want to be cautious but we also need to trust someone and while we’re not seeing predatory lending as we did during the 2007 and 2008 subprime mortgage bust, predatory lending is still out there so here are some ways to spot predatory lending.
What is predatory lending?
Predatory lending is the unfair practice that diminishes a borrower’s ability to repay debt and serves to benefit the lender rather than the borrower. This might involve loans with high-interest rates, hidden fees, undisclosed terms, or excessive fees. They typically target vulnerable borrowers with a too good to be true type of program or option.
Here are 10 ways to spot predatory lending.
#1. Higher interest rates than anywhere else.
You always want to shop around for the best loan whether it’s for a refinance or a new home loan. Research the current mortgage interest rates to give you a good idea of what to expect. If your credit is decent, you may be quoted something below average and if it needs improvement, you make it quoted something of a higher rate. But predatory lending may offer higher interest rates even if you have good credit. Definitely question anything that is beyond average.
#2. Excessive fees.
You’ll naturally have appraisal fees, credit report fees, title search and origination fees and application fees, but if you start seeing strange service fees that really have no purpose, it could just be a hidden profit center. Identify these fees and how they differ between lenders. There could be something not quite right going on here.
#3. Hidden fees.
Predatory lenders won’t necessarily disclose fees upfront but will hide it within documents. This could mean prepayment penalties and balloon payments.
#4. Prepayment penalties.
You should never have a penalty for paying off something ahead of time. It just shouldn’t be so if you pay off your mortgage before the term ends, and this means in a refinance as well, predatory lending means you might have some penalties and additional fees. However, federal law currently prohibits prepayment penalties after three years of your mortgage so if someone’s trying to charge you for these prepayment penalties ahead of time, that’s a big red flag. Make sure you ask about these directly or avoid loans with any prepayment penalties.
Related: The Hidden Costs of an FHA Loan
#5. Balloon payments.
This is a type of payment that will pop up later in the loan term. You might start off with a low-interest rate and loan payments but then at the end of a certain amount of time you will have to make a large payment, which may or may not be feasible. These increased fees can get out of control and many borrowers may lose their home due to foreclosure because they can’t make the balloon payment. It’s best to have a loan that does not include a balloon payment.
#6. Loan flipping.
This can occur when a lender refinances your loan into one with a higher rate and a longer-term without letting you know. The goal of refinancing is to pay less in the long run but a predatory lender could flip it the opposite way. Refinancing is only a good idea if it’s beneficial for you. But predatory lending can show you that refinancing again might be better even though if you’ve just done it, it’s probably not a good idea in the long run.
#7. Negative amortization.
Most loans take interest and some of the principal off your loan with each payment but negative amortization means your monthly payment is too small to cover any portion of the interest so the interest just keeps compounding and you end up paying significantly more in the long run.
#8. No credit check.
Run… Far away from any lender that won’t check your credit history. Credit checks are imperative to evaluate your ability to pay off your mortgage within the terms. Any lender that avoids this step should be avoided.
#9. Simply a bad reputation.
Before signing anything, take a look at the reviews and consumer reports about the lender or bank you’re using.
#10. Access to your bank accounts.
Lenders may want to see your bank accounts to see your income and outgo, but any lender that uses this to force payments out at will could empty your bank account leaving you with giant overdraft fees. You are responsible for paying your own mortgage and unless you set up automated payments, they should never access your bank accounts without your permission.
For more information about reputable lenders in St. George and Washington Utah feel free to give me a call. I’ve worked with excellent lenders over the years and have some options and references to provide you with the best possible lending experience.