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10 Ways To Avoid Predatory Lenders Peter G. Miller - Mortgage Lenders Plus.com Add to Delicious, diggit, reddit, technorati favs

They're out there. It doesn't matter where you live, how much you make or whether you're a saint or a sinner, predatory lenders want your business in the worst way.

Predatory loans come in two essential forms: First, mortgages designed from day one to require that you pay far more for financing than you should. Second, loans specifically constructed so that you will lose your home. These so-called "loan-to-own" schemes routinely result in the "encouragement of default" -- an expression which means predatory lenders are making loans with the hope that you will be foreclosed.

Among other traps, predatory loans often feature:

Unjustified interest costs. Predatory loans are not subprime mortgages. With a "subprime" or "bad credit" mortgage the lender charges a higher rate of interest because the borrower has weak credit. Borrowers who improve their credit can then refinance with lower-cost debt. Predatory loans are different because interest rates and costs are not justified by credit standing.

Hidden fees and charges. Predatory loans routinely have massive late fees and huge prepayment penalties. In effect, the borrower is locked into the loan/

Unfair escalator clauses. If you have a late payment, instead of collecting a late fee predatory loans sometimes feature an automatic and steep interest rate increase.

Tainted arbitration rules. Predatory loans often contain binding arbitration agreements. Instead of taking a lender to court, the borrower must arbitrate any dispute. While binding arbitration is a common business practice under the fair and even rules of the American Arbitration Association, predatory lenders distort the process by requiring borrowers to pay excessive fees up front and demanding that arbitration must be held in distant locations. The result: The borrower can't sue and arbitration is not practical.

Single-premium credit, life, disability or unemployment insurance. With this insurance the borrower makes a single payment up-front for insurance -- however the insurance is designed to cover the entire loan term, say 30 years. When the loan is paid off in far less time because the property is sold or refinanced the borrower does not get a rebate for the unused portion of the coverage.

Falsified loan applications. In these situations the mortgage application is altered by the lender without the borrower's knowledge or the borrower is encouraged to inflate income, employment and assets.

Predatory lenders make their money by charging steep mortgage interest rates, imposing unjustified fees and requiring big prepayment penalties. However, the largest pay-off for predatory lenders is probably the result of selling mortgages to investors, most of whom do not realize they are buying predatory mortgages.

Predatory lenders don't carry signs and they sometimes look exactly like legitimate mortgage lenders, however you can avoid predatory lenders by taking several steps. The FBI has issued guidelines which can help borrowers avoid the costs and pain of predatory lending. The FBI guidelines -- and some additional suggestions -- look like this:

1. Always shop for mortgages. The best protection is to know the mortgage marketplace, to see what financing options are reasonably available given your credit, income, debts and downpayment. Remember, there's no charge to speak with lenders -- and also remember that if a loan offer sounds too good to be true that's likely the case.
2. Know the real estate marketplace so you don't overpay. Speak with real estate brokers about home prices in areas where you want to buy or refinance. Visit open houses. Check MLS listings and online sites.
3. Know your sellers. If you have an interest in buying a home, be sure the seller is also the owner. Why? Because predatory lending is sometimes used in illegal flipping schemes. Protect your interests and use a licensed buyer broker when searching for a new home.
4. Beware of unaffordable "no money down" loans. These are loans which have great terms for a few months -- and predatory terms thereafter. Real estate is something you hold for the long term, so always look for loans which are affordable now and in the future.
5. Stay away from mortgage loan officers who want to falsify loan documents or who want you to lie on your loan application. As the FBI says, "do not let anyone persuade you into making a false statement such as overstating your income, the source of your down payment, or the nature and length of your employment." Do not sign anything you do not understand. If you need help, get assistance from a legal clinic, attorney or a community housing organization.
6. Borrow what you can afford, what's comfortable -- and no more. If you can afford a $150,000 mortgage and someone offers you $200,000, ask how you can pay such a debt and then ask why a responsible lender would make such an offer.
7. Never sign a blank document or a document containing blanks, including a loan application. Always have copies of every document you submit to a lender, including the loan application.
8. At closing, compare the loan application you submitted with the final loan application the lender will want you to sign. Do they have the same information? "Read and carefully review all loan documents signed at closing or prior to closing for accuracy, completeness and omissions," says the FBI.
9. Beware of "bait and switch" loans. Your lender must provide you with a good faith estimate of closing costs. Are the terms offered by the lender the same as the terms you're getting at closing? (Some costs such as the daily expense for interest and taxes may change if settlement is re-scheduled, but not interest rates or points.)
10. If you're borrowing to finance repairs or home improvements, make sure the lender's check is made out to you or that you must co-sign the check. This gives you leverage to assure that the contractor completes promised work.