In the recent real estate boom, the Federal Reserve found that younger consumers were able to purchase homes at a rate greater than any other period in real estate history. They were able to do this even with rapidly rising housing prices, and with typically lower incomes than older professionals. How were they able to buy more expensive homes with less money? Creative financing options, like ARMs, Interest-only loans, and hybrids were accessed by these younger consumers, a strategy that may be backfiring today.

With this kind of “easy money”--mortgages available to people who can meet minimal qualifications in the short-term, but who may not be able to afford their loans in the long-term--predatory lending practices can run rampant. People under stress and fearing they may lose their home may be the perfect prey for such activities. Identifying questionable practices in lending will prevent you from becoming a victim of scam artists.

Tricks and Traps of Predatory Lenders

When homeowners are at their weakest, they may believe they are about to lose their homes because they can’t afford the payments after a rate adjustment, or because they may be late on one of their payments. Potential homeowners who are unaware of their options may not fully understand loan terminology or types of loans. They may have some fear of their ability to qualify for the amount they desire for a dream home or feel that their credit and financial profile may prevent them from getting a stable, fixed-rate loan. In any of these cases, Freddie Mac notes that predatory lenders may do or offer the following:

• Charge excessive interest rates, fees, or points, claiming that a borrower can only qualify for a riskier loan or burdening terms
• Pack unnecessary costs like pre-paid life insurance or other credit products without disclosing the costs to the borrower, or claiming that it is required as part of approval for the loan
• Advertise loans that are designed for people with poor or no credit, or use high-pressure, limited-availability techniques to manipulate you into accepting loans that include excessive or unaffordable terms as a condition
• Try to get you to sign off on incomplete or incorrect loan documentation, or offer to “help” you qualify for a loan by creating fraudulent documentation
• Refinance your initially unaffordable loan with a loan product that includes different, but also unaffordable terms, rates, or fees
• Repeatedly refinance your loan to obtain more closing costs and fees from you
• Continuously follow up with you in a short period of time to convince you to refinance

Keep in mind that it is often a lack of understanding of loan products, repayment terms, closing costs or fees, and how your credit and down payment affects your ability to obtain a loan that allows predatory lenders to remain in business. Please see the Budgeting-help.com articles on “Understanding Credit” and “Types of Loans” to educate yourself before exposing yourself to questionable lending practices.

References

Freddie Mac. Buying and Owning a Home
Credit Union National Association. News Now