The collapse of the housing market has brought to light the amazing number of predatory lenders out there. This doesn’t just mean the normal shady lenders or individuals taking advantage of people with bad credit, but even major banks have been found to be guilty of absolutely reprehensible predatory mortgage lending practices. In the end it’s up to the consumer to watch out for predatory lenders, and to avoid the type of real estate lending scams that have damaged so many people’s lives and nearly plunged the economy into recession. Here are ten tips to help you avoid the types of loans that are dangerous when looking to invest in real estate, or anything else, for that matter.
1) Avoid loans that start out with interest only payments. This one should be obvious, but it’s amazing how often it falls through the cracks. If the payments are interest only, not only are you not making any progress to paying off the property, but there’s not even a guarantee that you’re breaking even. These loans tend to sky rocket in price later, and quickly become unaffordable.
2) There should never be a penalty for paying back the loan early. This is a sure fire sign that the lender is more interested in gouging you and lining their pockets than helping you out.
3) Severe objections to bi-weekly mortgage payments. Some legitimate banks don’t like this method simply because it cuts into their profit margin, but it’s almost a certainty that a predatory lender will never allow this type of payment plan.
4) Refusal to provide exact copy of terms at time of loan signing. Never sign loan documents unless you can walk out with an exact copy. There are many pages to loan contracts, and many people have signed documents (with only the last page requiring a signature) only to receive a much worse contract they never agreed on, complete with signature page.
5) Excessive up front fees. This one should tip off anything from home loan to credit cards. If there are a large number of up front fees, i.e. gouging, then you can be certain the rest of the terms of the loan won’t be kind to you, either.
6) Forbid any clause that allows one lender to sell your loan to another. The practice of selling off loans is, in its very best light, shady, deceptive, and under handed. Never allow this clause in a mortgage loan.
7) Mandatory Arbitration. This might not sound like a bad idea, but having mandatory arbitration means the lender picks the arbitrator and you sign away any right to take legal action, even if they blatantly break the law and/or contract.
8) Steering amp; Targeting. This basically means the lender you’re working with is really aggressively pushing a type of loan that might not even be in your best interests, and resorts to bullying tactics to do so. Remember the same thing I did if caught in this situation: you can always walk out the front door.
9) It’s a subprime loan. These loans are simply a rip-off and the reason the housing market is in as bad a shape as it is. If this is the only loan you can afford, then you can’t afford a house.
10) Refinancing for fees. This is sometimes referred to as “flipping loans,” and is the practice of refinancing a loan simply to generate more fees, and which might leave the borrower even worse off than before.
These are ten things to watch out for to identify a predatory mortgage lender, and my advice is to avoid them at all costs and find a fair loan with the fair terms that you deserve.