orangedwell7.jpg
orangeline.jpg
« Green Tags: Buying Into Renewable Energy | Main | Ten Things You Can Do Today To Make Your Home Healthier »

Mortgage 101: Top Five Signs of Predatory Lending

Predatory mortgage lenders knowingly lend more money than a borrower can afford to repay. The tactics used provide the lender with quick, upfront income and leave homeowners in a financial mess with their most significant asset at risk.

A surge in the subprime mortgage market over the past five years or so has allowed homebuyers with weak credit to qualify for "creative" loans. These have encouraged homeownership but have also led to increasing mortgage default and foreclosure rates.

Today, millions of Americans are losing their home because of predatory lending. If you are in the process of buying a home it is imperative that you understand predatory lending tactics and recognize the signs.

  1. Steering: A credit score of 620 is the line between prime and subprime. Other factors like downpayment and income affect a homebuyer's borrowing capability. Predatory lending targets borderline consumers and steers them into subprime mortgages, even when they could qualify for a better loan. Recent college graduates, cash-strapped buyers and minorities are often the victims of steering. According to Fannie Mae, half of today's borrowers with subprime mortgages qualified for better mortgage rates and terms.

  2. Excessive points and fees: Most borrowers focus on the mortgage rate and while they are distracted predatory lenders roll excessive points and fees into the financing. In the mainstream mortgage market, fees are typically less than 1% of the loan. Predatory loans often disguise fees and boost them to more than 5% of the loan.

  3. Abusive prepayment penalties: If you are borrowing under a subprime loan with the hope of refinancing, think again. Most subprime mortgages, about 80%, carry a prepayment penalty compared to only 2% of prime market mortgages. A prepayment penalty means a fee will be incurred for paying off the loan early. Some prepayment penalties cover three years and cost up to six months of interest. In other words you won't be able to get out of a bad deal without paying out thousands of dollars.

  4. Loan flipping: When a lender refinances a loan they receive a fee. If the refinance doesn't improve the borrower's rate or terms this is called "flipping". The tactic provides income to the lender without providing the homeowner any benefit. Flipping can cause unnecessary debt, increase monthly payments and deplete equity.

  5. Mandatory arbitration: This little clause in a predatory loan limits the legal remedies available to the borrower. In other words you can't take your lender to court even if your loan has abusive or illegal terms.
Further Reading You might like some of the other entries in the problogger.net Top 5 Writing Project:

Top Five Ways to Spot a Bad Contractor by Paul Thurst
Five Super-Duper Easy Ways to "Green" Your Life by lornadoone
5 Steps to Improve Your Credit Score by derek
Top 5 Surprises from a previous DIY'er by Chris D
Top 5 Eco-friendly Flooring Options by Cameron
Top 5 Green Companies to Put Your Dollars Behind by Crystal
Top 5 Reasons to Pay Off Your Mortgage by Michael Chantrel

Posted on Tuesday, May 15, 2007 at 06:42AM by Registered Commenterelle in , | Comments1 Comment | References3 References

EmailEmail Article to Friend

References (3)

References allow you to track sources for this article, as well as articles that were written in response to this article.

Reader Comments (1)

Found your post through the Problogger contest. Great post! As a fellow writer on the topic of real estate and mortgages, you've done a great job of making it clear how to avoid predatory lending.
May 11, 2007 | Unregistered CommenterMichael Chantrel

PostPost a New Comment

Enter your information below to add a new comment.

My response is on my own website »
Author Email (optional):
Author URL (optional):
Post:
 
All HTML will be escaped. Hyperlinks will be created for URLs automatically.