As more people face financial hardships due to the credit crunch, predatory mortgage companies are experiencing a business boom. Preying on the fear that people have over losing their homes, or embarrassment that others have over less than perfect credit, predatory mortgage companies sign people up for mortgages that they cannot hope to repay, or collect outrageous fees and then disappear.
A predatory mortgage company can encompass a wide variety of businesses. Some predatory mortgage companies have no plans to offer mortgages at all; they collect fees up front only to inform you that you have not been approved for the loan. Other predatory mortgage companies offer mortgages, but the terms are so onerous that the mortgage can destroy a family's financial stability. Predatory lenders are often difficult to prosecute, because the borrower has signed a contract agreeing to the terms.
If you know what to look for, it is possible to avoid predatory mortgage companies.
* Predatory mortgage companies are aggressive. They typically initiate contact. They may use telemarketing cold calls and direct mail to contact you.
* Everything is rushed. Offers are for a limited time. Because they often target those with less than perfect credit, they know their customer may ask fewer questions and be less savvy about the loan process.
* They make recommendations that do not make sense, such as asking you to agree to a high initial interest rate, with the promise of refinancing after one year.
* They do not seem concerned about your ability to service the debt. They agree, or even encourage you to take on a loan too large. Reputable lenders typically cap loan repayment at 30% of monthly income. Anything greater than this increases the risk of defaulting on the loan.
* Loan paperwork includes conditions such as balloon payments, prepayment penalties and mandatory arbitration.
* Promise that bad credit will not affect being approved for a loan.
* Ask for large up front fees. They will have a seemingly legitimate reason for these costs, but a legitimate lender brings any payments into the closing costs.
* Read everything, if what the person says is greatly different than what is written in the contract, you should be suspicious.
How to avoid a predatory mortgage company
* Ask your friends and family members who recently purchased homes what lenders they used and what the experience was like.
* Stay local. While legitimate companies advertise on the Internet, if you are concerned about predatory lending, stay with a local bank or credit union for your mortgage needs.
* Know the total cost of the loan, the annual percentage rate, the amount of the monthly payments and the length of the loan. The lender can provide you with this information, and a responsible lender is willing to do so.
* Ask for an explanation for all fees. Often a predatory lender will have duplicate fees as a way to increase profits. Your lender should have a satisfactory definition for each expense.
* Avoid loans that include balloon payments. While a balloon mortgage lowers your monthly payment substantially, at the end of the term, the balloon payment must be made. Even if the lender "guarantees" help in refinancing the balloon, it is a bad idea. You can easily end up owing more than the property is worth, making refinancing impossible.
* Before you sign anything, contact your state's Attorney General and ask if there are any complaints against the lender.
* Do not feel bullied. Regardless of how far into the loan process you are, you can back out. Truth in lending laws permit you to back out of a loan agreement at any time, and you should do this if any red flags are raised. If loan terms and conditions are different on the day of closing than they were during the time leading up to closing, tell the lender you need to pause and review the documents. If they try to rush you through the closing, tell them you have changed your mind and are using pursuing a different lender.
* Predatory mortgage lenders count on the fact that many of us are unfamiliar with basic lending laws and may be intimidated by the lending process. Research interest rates, closing costs and understand the basic approval process. This will help you recognize if you are being conned.
What if, despite your best efforts, you are the victim of predatory lending? After you sign a loan document, it is not final. You have three days to back out of the contract for any reason, or no reason at all. Contact the lender in writing and let them know that you want to be released from the contract. If it has been longer than three days, contact your state's Attorney General. This office is in charge of consumer protection, and they can help you pursue actions against the lending company.
