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Avoiding Predatory Lending
Avoiding predatory or deceptive lending is an important part of applying for mortgages, refinancing, or home equity loans. People who fall victim to such practices may have to pay much more to the lender than they actually need to, and could eventually lose their homes. Here are some characteristics of predatory lending which borrowers should try avoiding...
1. The borrower might be pressured to sign papers without reading or understanding them. Signing contracts, agreements, or other documents without fully comprehending their meaning can be very financially dangerous and give predatory lenders legal permission to apply unfair policies.
2. A broker or someone else involved in a home sale may encourage or pressure borrowers to put false information on a mortgage application. This might be an attempt to defraud the lending institution or enable one lender to fraudulently sell the loan to another, and could allow the borrower to obtain a mortgage he or she cannot afford. According to hud.gov, entering false information on applications is considered a crime, so avoiding such pressures is important.
3. Predatory lenders may promote their offerings as only being available for a short period of time, or claim to provide loans to people with poor credit records. The Federal Home Loan and Mortgage Corporation ("Freddie Mac") website warns borrowers to beware of such lenders, along with those who charge a fee in exchange for very fast approval.
4. The loan might involve excessive fees, penalties, or interest rates for the borrower. Some predatory lenders bundle expensive additional services with them. It is of importance for borrowers to compare every option available to them, avoiding anyone who tries to convince them otherwise.
5. A fraudulent appraisal may be used to sell a home at an inflated price and misrepresent its value to mortgage lending institutions. Always be sure to conduct some independent research on the value of homes in the same geographic area, so as to verify that an appraisal seems reasonable.
Keep in mind that predatory lending is often targeted against people considered to be more vulnerable, such as first-time homebuyers or the elderly, but it is applied to others as well. Here are some additional tips on avoiding predatory lending...
1. Loan disclosures can help potential borrowers better comprehend the terms of a mortgage. Be sure to read and understand them. According to the Washington State Department of Financial Institutions, such disclosures should be provided no later than three days after an application is submitted; it also warns that not receiving a loan disclosure can be a sign of predatory lending.
2. Predatory lenders sometimes try to convince people that they can only qualify for mortgages with unfavorable lending terms or high interest rates, even if this is not actually true for many of them, thus deceiving people into avoiding better loans they would be approved for. If borrowers are unsure of what type of mortgage they can qualify for, they should conduct research with regard to this, determine their credit scores/records, and consider applying for the preferable type of mortgage first.
3. Prepayment penalties are not necessarily a sign of predatory lending, but avoiding loans with excessive penalties of this type is important. According to the Center for Responsible Lending, such penalties are considered "abusive" if they remain in effect for over thirty-six months, or consist of greater than a half year worth of interest.
Generally, the best ways of avoiding predatory lending are to learn as much as possible about each step of obtaining a loan, carefully review and comprehend all associated paperwork, and reject the use of pressure tactics. It is never worth putting oneself at severe financial risk to save time or increase the chance of purchasing a desirable property.
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