How to spot predatory mortgage lenders when buying or refinancing a home

Buying or refinancing a home? Don't become a victim of predatory lending tactics. Watch out for these red flags when making financing decisions.

Buying a home is complicated - especially when it comes to choosing the right financing. While most lenders are legitimate, legally compliant businesses, predatory lenders are still out there. They target people looking to finance a new purchase, refinance an existing mortgage or obtain financing for renovations and repairs. They often prey upon those most vulnerable - for example, the elderly or inexperienced.

These lenders exist solely to make money off unsuspecting consumers. If you fall into one of their traps, you may end up with:

  • Decimated equity
  • Exorbitant fees
  • Unpayable debts
  • Tarnished credit

Ultimately, you could lose your home and become burdened with long-term financial struggles.

Beware of these red flags

The key to avoiding predatory lenders is to be aware of their tactics. Predatory lenders use various strategies to take advantage of consumers. They often try to conceal these strategies behind smooth talk and mounds of paperwork. However, if you dig deeper, you may find these hallmarks of problematic loans:

  • Unreasonably high interest rates: These rates may be buried deep within the terms of the loan.
  • Unreasonably high fees and closings costs: Watch out for fees totaling more than eight percent of the loan value.
  • Mandatory arbitration clauses: These clauses can strip away your right to challenge the lender in court. They can be extremely one-sided.
  • Balloon payments: Hidden in the paperwork may be a clause requiring you to pay the entire balance after a certain period of time - or else lose your home.
  • Prepayment penalties: Abusive penalties may prevent you from getting out of the loan.
  • Add-on products: Predatory loans will sometimes include extra insurance products you don't really need. These products will drive up fees while providing little or no value to you.
  • Absence of required disclosures: Predatory lenders may not supply you with legally required documentation such as good faith estimates of closing costs, truth in lending disclosures and HUD-1 settlement statements.

How predatory lenders find victims

Predatory lenders are often extremely savvy when it comes to targeting unwitting buyers. They use sneaky, high-pressure sales ploys to coerce consumers into signing.

Proceed with caution if a lender:

  • Persistently contacts you and solicits your business
  • Pressures you into signing blank forms or forms you don't understand
  • Offers "limited time only" deals
  • Encourages you to falsify or inflate your income
  • Promises terms that seem too good to be true
  • Holds the closing at an unprofessional location - for example, another business or private home
  • Discourages you from speaking with an attorney before signing
  • Steers you into one particular type of loan which may have unfavorable terms

A legitimate mortgage loan should be affordable and transparent.

Be aware, be knowledgeable, be discerning

When making a big leap that will affect not only your home ownership, but also your financial stability over the long run, it's well worth it to take your time. You should feel confident that you're making the right decision.

The surest way to avoid predatory lending schemes is to consult with an attorney. A knowledgeable real estate lawyer will readily see through the subterfuge and let you know what's really going on.

Keywords: mortgage, predatory lending, real estate, home buyers, mortgage scams, refinancing