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Home Buyers: Protect Yourself from Predatory Lenders

Home Buyers: Protect Yourself from Predatory Lenders

Horror chronicles about victims of predatory lending are all over in the media these days. Abusive or “predatory” loaners aim people who are “house rich, but cash poor,” that is, consumers who have built up a lot of value in their homes, but do not have much available cash. The types of loans offered usually have sky-high rates of interest and fees.

Predatory lending is a set of loaning practices that takes unjust advantage of consumers. Consumers end up taking out loans that they can't afford, have deceptive or unclear terms in them, or which cost more than necessary and may ultimately lead to the loss of one’s home. Most predatory loans occur in the sub-prime market, but not all sub-prime lending is predatory.

Consumers need to be aware of predatory leading practices when searching for a loan. The Better Business Bureau urges consumer to be aware of the variety of predatory lending practices that are occurring with some lenders in the industry:

Equity stripping occurs when a loan is made based on the equity in a property rather than on a borrower’s ability to repay the loan. These loans usually result in the loaner acquiring the borrower’s home and any equity the borrower had in the home.
Packing are the practice of adding credit insurance or other “extras” to increase the lender’s profit on a loan.
Flipping occurs when a lender induces a borrower to repeatedly refinance a loan, often within a short time frame, charging high points and fees each time.
Traps are terms within the loan that will likely force the borrower to refinance or enter into foreclosure. Traps include balloon payments, negative amortization, prepayment penalties and mandatory arbitration.

How can you tell if a lender is a scammer? The BBB offers the following “Dos” and “Don’ts” to help you protect yourself and your home:

DON’T
Do business with loaners that you have not checked out.
Be rushed into signing a loan because it is a “Limited Time” offer. A lender in a hurry to get the loan should serve as a warning sign to take extra care to make sure that the loan is being properly structured.
Sign documents with blank lines. Make sure that all space is filled in on the loan application before you sign it.
Lie on your loan application. When you apply for a mortgage loan, every piece of information that you submit must be accurate and complete. Lying on a mortgage application is fraud and could result in criminal penalties
Pay upfront fees without an explanation. Do not pay sizeable upfront fees. Reputable brokers and lenders do not charge high upfront fees.

DO
Check out the reliability of the company with the BBB (www.cinbbb.org).
Shop around for the best loan for your situation.
Borrow only the amount you need and can afford to pay back.
Review all documents or have someone you trust review them for you.
Know that you generally have three days to cancel loans signed on your home.
File a complaint with the BBB (www.cinbbb.org), your state’s attorney general office or your local Department of Consumers Affairs, if you think you are the victim of a predatory loan.

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Know the Facts about Reverse Mortgages

For older homeowners who are looking for a way to tap into the equity they have built up in their homes over the years, a reverse mortgage can be a good solution. Reverse mortgages allow homeowners to turn their home equity into spendable cash without having to make monthly interest or principal payments.

Under a reverse mortgage, the lender sends the borrower money via a lump-sum payment, a line-of-credit, monthly check or a combination of all three. The homeowner is not required to pay back any of the loan advances or interest until the loan term is over. Generally, no repayment is due until the borrower no longer occupies the house
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Before venturing into a reverse mortgage the Better Business Bureau, along with the Federal Trade Commission suggest that homeowners consider the following facts:

Reverse mortgages are rising-debt loans. The interest is added to the principal loan balance each month, because it is not paid on a current basis. The amount you owe increases over time as the interest compounds. Some reverse mortgages have fixed-rate interest; others have adjustable rates that can change over the lifetime of the loan.

Reverse mortgages use up some or all the equity in your home, leaving fewer assets for you and your heirs.

There are three types of reverse mortgages — Federal Housing Administration (FHA)-insured, lender-insured, and uninsured — and these vary according to their costs and terms. Check the features of each to select the type that is best-suited for your needs. Before considering any reverse mortgage, consult with family members, your attorney, or financial advisor.

Reverse mortgages typically charge loan-origination fees and closing costs. Insured plans charge insurance premiums, while some plans have mortgage servicing fees. You may be able to finance these costs if you want to avoid paying them in cash. But, if you finance the costs, they will be added to your loan amount and you will pay interest on them.

Your legal obligation to repay the loan is limited by the value of your home at the time the loan is repaid. This could include any appreciation in the value of your home after your loan begins.

The federal Truth in Lending Act (TILA) is one of the best protections you have with a reverse mortgage. TILA requires lenders to disclose the costs and terms of reverse mortgages. This includes the Annual Percentage Rate (APR) and payment terms. If you choose a credit line as your loan advance, lenders also must tell you of charges related to opening and using your credit account.

Before signing any contracts for a reverse mortgage, be sure to check on the reliability of the company with the BBB at www.bbb.org. The BBB also provides complaint and dispute resolution assistance for consumers to seek recourse and achieve a fair settlement if they have been treated unfairly in the lending process.

For more specific information about reverse mortgages check the recommended unique resources below.
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