Q: I am looking at the wide variety of loans to purchase a home. Is it safe to assume all companies and loans are the same?
A: For most families, buying a home is the biggest and smartest purchase they ever make. Unfortunately, not all loans are in their best interest.
When loans hurt instead of help, they can quickly lead to foreclosure and even bankruptcy. It’s important to learn the warning signs and common problemsassociated with predatory lending, and to ask the right questions when shopping for low cost loans.
Possible warning signs of a predatory loan
- It sounds too easy:”Guaranteed approval” or “no income verification” sometimes indicate that the lender doesn’t care whether you can afford to make the payments over the long haul.
- Excessive fees:Make sure fees are typical of those in your market. Because these costs can be financed as part of the loan, they are easy to disguise or downplay. On competitive loans, fees are negotiable. It is common for home buyers to pay only one percent of the loan amount for prime loans. By contrast, a typical predatory loan may cost five percent or more.
- Closing delays:A lender who deliberately delays the closing may be waiting for the commitment on a reasonably-priced loan to expire.
- Over-valued property:Inflated appraisals can allow for excessive fees to be included in the loan, resulting in the borrower owing more to the bank than the home is worth.
Nearly all predatory lending occurs in the “subprime market,” where loans are sold to people with less than ideal credit histories. Subprime loans have played an important role in helping millions of consumers achieve homeownership, but, unfortunately, some lenders abuse their role and take unfair advantage of vulnerable borrowers. Here are some common problems with predatory loans:
- High interest rates and fees:Predatory lenders often charge extremely high interest and fees that are added into the total amount of the loan the borrower must repay. These lenders charge what they can get away with, not a fair amount based on the credit history of the borrower.
- Broken promises & bait and switch:Sometimes home buyers are offered a new loan or a refinance of an existing loan that seems to meet all of their needs–only to find that interest rates and fees have changed when they get to the closing table. Agreeing to last-minute changes can cost thousands of dollars and result in a loan they just can’t afford.
- Loans that start low and go high:Adjustable rate loans are popular in today’s market, but many that seem affordable are likely to have steep cost increases in the future. Avoid “payment shock” by considering whether you can pay for the loan both now and in the future.
Ask the right questions when shopping for the lowest-cost loan
REALTORS® develop relationships of trust with the families they serve, and can help you avoid predatory loans by encouraging careful shopping. Ask these important questions:
- What is my credit score? Can I have a copy of my credit report?
- Is the loan’s interest rate fixed or adjustable?
- What is the term (length) of the loan?
- What are the total loan fees?
- What is the total monthly payment? Does this include property taxes and insurance? If not, how much will I need each month for taxes and insurance?
- Is there an application fee? If so, what is it, and how much is refundable if I don’t qualify?
Other ways home buyers can protect themselves from predatory lenders
- Check out lenders with the Better Business Bureau, government websites, or other consumer groups. How long has the lender been in business? Have consumers filed many complaints? Does the lender belong to a trade association with ethics requirements for its members?
- Avoid unnecessary contract extensions that could cause the lender’s loan commitment to lapse.
- Get educated on the value of your home by asking your REALTOR® for a comparative market analysis.