Are you in urgent need of a mortgage loan? Choose your lender carefully. The market is full of predatory lenders who are eager to sell you a mortgage with abusive rates that will make your financial situation worse, not better.
What are the first signs that a loan is predatory?
The interest rates for predatory loans are generally high compared to the rest of the market. Lenders may suggest offsetting these fees by frequent refinancing ("flipping") of loans, which is another bad sign. High pressure tactics are a third bad sign; predatory loans are what one expert calls "loans seeking consumers," and lenders are aggressive in seeking out new customers. Unlike legitimate lenders, they solicit door to door or by telemarketing as well as by mail.
What do the terms of predatory loans look like?
Mortgage loans offered by predatory lenders have a wide range of unethical fees attached, as well as having high interest rates. Some of these fees are:
• Penalties for early repayment. Predatory lenders want to force borrowers to stay with them for as long as possible, so they penalize borrowers for repaying the mortgage loan before the end of the term. While nonpredatory loans very occasionally have prepayment penalties for paying off the loan within one to three years, a term that is unlikely to inconvenience homeowners, predatory loans frequently have penalties for paying off the loan even after three years. Turn down any loan you are offered that has a prepayment penalty for a term shorter than three years, and take a long, hard look at any loan that has a prepayment penalty for any length of time. Because good lenders rarely append prepayment penalties, the existence of this penalty suggests that the mortgage loan is predatory.
• Kickbacks, or "yield spread premiums." When a mortgage broker charms a borrower into signing for a mortgage with an interest rate that is much higher than the borrower would be able to get from an honest broker, the brokers reward is a sum called the yield spread premium. This kickback is a strong incentive for the broker to talk you into a high interest rate. If the mortgage loan you are offered includes a yield spread premium, back away. Legitimate mortgages never have yield spread premiums.
• Routine fees that have been increased outrageously. Calculate how much extra you will pay in fees attached to your mortgage loan. If they are under 1% of the loan amount, they are normal. Fees above 1% are the sign of a dishonest loan; some predatory loans charge above 5%.
Because of the credit crunch, it is easier than before to avoid dishonest mortgage loans. Even predatory lenders no longer have so much available credit that they can afford to make offers to borrowers who might not be able to cover their payments. However, scarce credit has also put the pinch on borrowers, making them less finicky than they would otherwise be. If you are in trouble, resist the urge to grab for any lifeline you see. It may land you in even greater trouble. Take your time, go over all the terms in detail, and avoid any lenders whose high pressure tactics make you suspect that they need you more than you need them.