How to recognize and avoid predatory lenders when buying or refinancing a home
Authored By: LawHelpNY
Lots of dishonest, aggressive, lenders advertise their loans to homeowners in financial need - people who have fallen behind on property taxes, need money for medical bills or need costly home repairs. Instead of offering a fair loan, these lenders use smooth-talking salespersons whose loans carry high-interest rates, outrageous fees, and unaffordable repayment terms. They can trick you into taking out loans that you cannot afford to repay. Some people even lose their homes to foreclosure. That's a high price to pay for choosing the wrong lender.
How to spot a dishonest lender
Be suspicious of anyone who offers you "bargain loans," whether they mail or email you an offer, call you on the phone, or come to your door. Avoid salespeople who promise "No Credit? No Problem." A bad loan is a costly mistake. Beware of offers that are only "good for a very short time." Be suspicious of anyone who contacts you first - most good mortgage lenders or credit companies don't solicit business over the phone or just show up on your doorstep.
Avoid lenders who call you and promise guaranteed, low-interest loans, who take applications over the phone, or who offer next-day approval if you pay them some money today. Say "No" to lenders who ask for up-front fees "to cover the first payment and other expenses." Why? Because they never intend to give you the actual loan - they just take the up-front money and run.
How to find an honest lender
If you need a loan, start by asking local banks, credit unions, or mortgage companies. Whether you borrow for home repairs, medical expenses, or to consolidate your debt into a single monthly payment, compare the total costs of the loan as well as interest rates. Points and fees and complicated. Study them until you understand them.
A loan with a lower monthly payment is not always the better deal; it may have a high balloon payment that is due in a few years. Call or visit local housing counseling agencies that offer counseling on how to find a fair loan.
Before borrowing money, know exactly what the lender is offering. You have a legal right to have - in writing - the total cost of the loan, the annual percentage rate, the monthly payments, and how long you have to pay back the loan. Always ask questions until you understand everything. Ask the lender to explain all fees and points. When you borrow money, it is important to compare more than the monthly payment. Remember that credit insurance - such as life insurance to pay off the loan if the homeowner dies - can have a very high premium and only protects the lender, not you. Once you've narrowed down your choices to a few lenders, check with your state attorney general and ask if there have been complaints against the companies.
What to do before signing
Avoid "balloon" payments
One way that lenders make loans sound very good is to make the monthly payment small but then require a big balloon payment at the end of the loan period. Some loans have you wait to repay the entire loan amount until the loan term ends. Dishonest lenders may promise to help you refinance when it comes time to pay it off, but watch out! This promise may be just a way for the lender to charge you higher fees and closing costs. Predatory lenders make money by charging excessive fees every time they refinance the loan and they'll encourage you to refinance often.
In the worst case, you can end up owing more money than the house is worth. AARP has helped several homeowners sue fraudulent lenders when the homeowners lost their homes (or were about to) because of many high priced refinancings.
Consider reverse mortgages
If you are 62 or older, a reverse mortgage may be better than getting a home equity loan. A reverse mortgage, which is based on the equity you have built up in the house over time, gives you money that you don't have repay until you move, sell the house, or die. You can choose to get the money as a lump sum payment, a monthly income, or a combination of both. If you get a reverse mortgage, you can't lose your house to foreclosure the way you could with a home equity loan.
Since a reverse mortgage uses the equity in your home, you need to consider your options carefully. For instance, if your home does not continue to grow in value after you take out a reverse mortgage, you may have less of an estate to leave your heirs.
Read everything carefully
Whenever you borrow money, don't sign anything you don't fully understand. Always assume that any paper you sign is a contract. You can insist on changing anything in a contract that you don't like or can't agree to. If the lender won't change the contract to your satisfaction, get a loan somewhere else. Some predatory lenders dramatically change the loan terms at the last minute from what you thought you were promised. Before you sign the loan papers, ask a lawyer or trusted friend to go over them with you. Don't sign a document with blank spaces; all spaces should be filled in before you sign.
After You Sign
You can change your mind
You can back out of getting a loan any time before you sign. Stop the loan process if a new development surprises you until you get answers you need. If you've already signed a contract that uses your home as security, the Truth in Lending Act allows you to change your mind, for any reason, within three business days of signing the contract. If you change your mind, put it in writing and mail to the lender.
Get help if you think you have an unfair loan
Contact your county office of consumer affairs or your state Attorney General's office. You can find their numbers in the blue (government) pages of your phone book. If you are a victim of bad loans, let others know. You can help stop predatory lenders from victimizing someone else. Report the fraud to the Federal Trade Commission.
Federal Trade Commission
Federal Trade Commission cautions homeowners to be on the lookout for home equity scams.
National Consumer Law Center
National Consumer Law Center has detailed information on how to spot home loan scams in this PDF brochure.
Disclaimer: This content is offered only as a public service and does not constitute legal advice. You should contact an attorney who is knowledgeable in this area to obtain advice with respect to any particular issue or problem.