How to Avoid Predatory Lending
Predatory lending, or abusive loan practices, can manifest itself in many different ways. Most often, this illegal behavior is committed by lenders, but home appraisers and real estate professionals have been guilty of predatory lending practices, as well.
What are some examples of predatory lending?
- A lender or real estate professional encourages you to make false statements regarding income, in order to obtain financing.
- A lender charges you a higher interest rate based on something other than credit, such as your race.
- A lender pressures you to accept a high-risk loan, such as one with a balloon payment, or one with a very high prepayment penalty.
- A lender finances huge fees into the loan. Borrowers in this situation are often charged fees of just under 8% of the loan amount in fees, compared to the average 1-2% usually charged by banks when they originate loans.
- A lender charges you a higher interest rate than your credit score warrants.
- A lender pressures you into adding credit insurance, life insurance or disability insurance into the loan.
- A lender pressures you to withdraw equity from your home when you refinance, for improvements or debt consolidation you really don’t need, causing you to owe more on your loan than your home is worth.
- A lender pressures you to obtain a mortgage you feel is more than you can afford.
How can you protect yourself from predatory lending practices?
- Make sure your credit report is accurate. Lenders use credit reports to determine risks in making loans to borrowers.
- Have an attorney look over any loan documents before you sign them. Don’t allow a lender to rush you through the loan process; take the time to make sure all the information on your application forms is correct.
- And remember, consumers generally have three days after the close of a loan, called the rescission period, to change their minds for any reason, or even if there is no reason, and cancel the loan.
A bad loan can cause you to lose your chance at buying a desired home, lose the equity in your current home, or force you to sell your home when you find yourself unable to make unreasonably high loan payments. Protect yourself by learning the signs of predatory lending, and educating yourself on the loan process.
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