Despite the mortgage-lending reforms that followed the 2008 economic crash, it’s your job as a consumer to be on guard against questionable lenders — especially if you have damaged credit and shaky finances.
Here’s how to protect yourself.
Know what you can afford. The first step toward protecting yourself is to be armed with knowledge of your financial situation and the lending process. Know your credit score. Those with credit scores below 650 are typically offered subprime loans with higher interest rates. Before talking to a lender, get a free copy of your credit report at www.AnnualCreditReport.com. In addition to providing your credit score, the report will list any black marks on your report. Be sure to challenge any mistakes you find. Look at how much money you have coming in and how much house payment you can afford after paying all your other bills. Don’t forget to include annual property taxes, insurance and any homeowners association dues. Predatory lending lures people into loans that they cannot repay, leaving them vulnerable to foreclosure.
Look in the right places. Avoid flyers, pop-up ads online and unsolicited phone calls. Go online and research companies. Shop three or more mortgage lenders. Seek out well-known lenders. Even if they won’t lend to you, they can direct you to legitimate alternatives instead of scam companies.
Compare interest rates, terms and fees among lenders. Shopping lenders gives you perspective on what’s available to you. If you have credit history problems, you will pay higher interest rates, but federal law caps the maximum rate above the prime lending rate at 6.5% for first mortgages on a home. Also, by law, once you fill out a mortgage application, the lender must supply you with a loan estimate (LE) within three business days. That disclosure should have all the terms of the mortgage. If it’s unreasonable, go elsewhere.
Know predatory tactics when you see them.
- They ask you to lie on the mortgage application. Besides being a crime that could land you in prison, it’s a red flag that the lender is unscrupulous. You should never knowingly put false information on a loan application.
- They pressure you to act now. As with any big financial decision, taking the time to make a wise decision is essential. Anyone who pressures you to decide quickly is looking out for their own interests, not yours.
- They have high fees and penalties built in. High fees for the loan, higher than normal penalties for late payments, and penalties for paying the mortgage off early are all red flags and all have serious negative financial consequences. Walk away from a lender who tells you that you can refinance later for better terms.
- They have a clause in the agreement that you cannot sue the lender, and you must use arbitration for disagreements. This should be a big red flag to you.
Proceed with caution with these kinds of loans.
- Adjustable Rate Mortgages (ARM) offer a “teaser rate” at the start of the loan that seems reasonable and tempting. However, at some predetermined point the rate “resets” to a higher rate and often the borrower can’t afford the higher payment. If you do take an adjustable-rate mortgage, be sure you can handle the later, higher payments AND make sure there is a maximum or “cap” on how high the rate can go. All these terms will be in the disclosure and loan agreement so read them carefully.
- Interest only loans. These loans should be avoided. For an initial period of five years to ten years, payments go only toward interest, not principal. When the higher payment starts (interest plus principal now) you may not be able to afford it and you probably can’t refinance because you have little equity in the home.
- Loans of 40 years or more, even with a fixed rate. These loans may seem attractive for the lower payments, but in the end you pay dramatically higher total interest than shorter-term loans.
