Buying a home is one of the biggest financial transactions most people will ever enter into. Because of the complexity and size of these transactions, however, many homebuyers lack the information they need to successfully navigate the home-buying process. Unfortunately, mortgage lenders often take advantage of homebuyers’ lack of information, with the result that many homebuyers end up paying much more for a home than necessary. When lenders take advantage of homebuyers’ misunderstandings and lack of information, they are usually engaging in practices called predatory lending. Below, I’ve set forth some of the most common predatory lending practices in order to equip you with the knowledge you need to protect yourself.
Excessive Fees. Most loans include fees and other charges associated with originating and servicing your loan. Usually, these fees should be less than 1% of the total loan amount. However, many predatory lenders charge 5% or more. And, because these fees are often financed as part of the APR, they can be hard to detect.
Abusive Prepayment Penalties. Homeowners with subprime mortgages often wish to refinance into better loan terms as soon as they are financially able to. Excessively high prepayment penalties, however, can mean that they are slapped with hefty fees when refinancing to better terms. Thus, many homeowners are stuck between staying in their high-interest subprime loan, and paying high prepayment penalties when refinancing.
Loan Flipping. Lenders sometimes convince homeowners to refinance their mortgage even when there is little to no benefit for the homeowner. The lender can then charge thousands of dollars in refinancing fees.
Mandatory Arbitration. Many lenders include mandatory arbitration clauses in their loan documents. When homebuyers sign these clauses, they are, in effect, signing away their right to sue in court. As a result, the homebuyer’s sole remedy to resolve disputes is through arbitration––a process that deprives many homebuyers of the resources, leverage, and information they would otherwise be entitled to in court.
Steering and Targeting. Many lenders have incentives to “steer” homebuyers into accepting subprime mortgage even though they qualify for lower-cost prime mortgages. Barrowers are subjected to aggressive sales tactics, and strong evidence exists to indicate that minorities are most prone to being steered into these high-cost loans.
Now that you are aware of some of the more common predatory lending practices, below are some tips you can use to protect yourself when purchasing your next home.
1) Attend a local homeownership education course offered in your community.
2) Check and compare prices of several homes within the neighborhood you are looking in.
3) Shop around for lenders and compare costs.
4) Read all loan documents and ask questions. Do not sign anything you do not understand. Consult a real estate attorney if you still do not under questions. Many services also exist that will provide free or low-cost advice––for example, the federal government’s Department of Housing and Urban Development will coordinate free consultation on your home mortgage questions.