Home and Refinance Loans by Predatory Lenders – Sub-Prime Loans to Avoid

Every year, low income persons seeking to purchase a home of their own are swindled out of over nine billion dollars by predatory mortgage lenders. To ensure you are not one of those persons taken in by a not so ethical mortgage lender, be on the look-out for the following signs that one is attempting to lure you into purchasing a predatory subprime loan.

1. Prerequisite Up front payment for Credit Insurance

It is a highly discouraged practice that the cost for credit insurance be added into the overall initial, lump-sum payment. For example, in the case of credit life, a form of credit insurance, the loan recipient pays monthly fees to offset the loss should he | she die before the amount of the mortgage of has been fully repaid. The product can be useful when paid for on a monthly basis. The reason that the full cost of credit insurance should not be paid up-front, is that, even over the course of the loan, it often is not an amount that is ever be paid in full.

2. Inordinately high fees above and beyond those commonly found within the mortgage market

Within the mortgage industry, though there no formal limits as to the interest rate amounts which a broker can legally set, there are market-bearing guidelines which stipulate that one should not be charged more than three percent (four for Federal Housing and Veteran loans)of the loaned principal. As investigators of predatory lending have shown: additional costs, i.e. points and fees charged by wayward lenders that are greater than the three percent amount, are bilking borrowers for greater sums of money than even exists taking into account the potential for risk. Unable to justify the higher cost(s), investigators declare that anything above these rates are simply taking advantage of those who, desperate, to secure a loan will pay virtually almost any fee so long as it is amortized over an extended period of time.

3. Severe penalties for making payments before their official due date

Penalties associated with prepayment of the loaned amount are covert, delayed charges (up to five percent) that account for the majority of the bilking practices conducted by unsavory mortgage brokers. It has been determined that subprime loans should not include such punitive measures because, in doing so, they lure borrowers into loans with exceedingly high rates.

In theory, the subprime loan should offer borrowers a route that leads to traditional financing at the time when the borrower is prepared to bridge the gap. The problem is that penalties billed for prepayment avert such a transition from occurring.

Within the subprime market, some 80 percent of borrowers have reportedly approved of the prepayment penality stipulations in order to secure the loan they fervently sought. In comparison, within the traditional market only about two percent of borrowers don’t question the prepayment penalty clause.

4. Avoid yield spread fees

Fifty percent of all mortgage loans are orchestrated by brokers. Though only in limited numbers, a small group of brokers have been known to facilitate a sizable amount of the predatory loans. Such unscrupulous brokers charge borrowers what is known as a yield-spread premium or dollar amount lenders kick-back to brokers in return for their having jacked up the interest rate category in which the borrower ended up being placed.

5. Coaxing on the part of the mortgage lender for you to purchase their ‘special’ product

It is the ethical duty of a lender to ensure that borrowers receive the lowest priced loan for which they qualify. As studies conducted by both government-affiliated mortgage lenders, Freddie Mac and Fannie Mae found, subprime | predatory lenders charge borrowers with blemished credit ratings, lower than average incomes and additional lending hazards, higher than average lending rates. Reports gathered by the Housing Urban Development organization, showed that the practice of coaxing is often racially biased. Specifically, African Americans in low-income neighborhoods stand a five times greater chance than a Caucasian person of being presented with a predatory loan from a subprime lender.

7. Flipping Practices

The term flipping with respect to mortgage refers to the multiple times a lender charge a borrower identical fees within the refinancing process. Considered to be on the most detrimental forms of abuse within the mortgage industry is the act of repeatedly adding on fees to subprime loans. This then takes funds away from the borrower without providing anything tangible in return.

If in doubt whether a loan presented falls within the predatory classification, contact your local consumer protection agency to the loan being considered is in alignment with the industry level standards and acceptable practices.