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How To Avoid Predatory Lending When Shopping For Home Loans

Have you ever heard the term loan shark? This is not a new species of fish that was discovered off the Pacific coast, it is the sometimes criminal practice of offering unsecured loans at high interest rates that are collectible via the threat of violence.

While the present day mortgage and home loan industry is more typically civilized than this, one thing that does remain the same is that your financial institution will be more concerned with beefing up their accounts receivable statement then looking out for your health and wellbeing. There will be nobody looking out for you when it comes to protection from predatory lenders, so this guide will help you develop the street smarts to know when a lending institution or bank is trying to take advantage of you.

Predatory Lending Explained

So what exactly is predatory lending? It is issuing costly new home loans to borrowers without regard to their ability to pay the loan back. This type of setup will usually involve higher than normal interest rates, high closing costs, and terms that make it very difficult to refinance or sell the home.

While today defaulting on this type of loan may not result in physical violence, it can lead to you and your family being removed from your home with your bank pocketing a large amount of your money.

Other Ways Banks Take Advantage Of Borrowers

What can be done to identify and avoid this type of troubling financial scenario? Begin by realizing that even if the terms of your mortgage or home loan are benign enough that they would not be ruled to be "predatory" in a court of law, there are plenty of other more subtle ways that your financial institution might take advantage of you.

One tactic is to require a buyer to pay more on the house than it is actually worth, so that if/when it comes time to sell there might be a short sale scenario where you owe more money on the house then you can sell it for. Your lender might also give you smaller interest rate and closing cost figures when you are discussing the loan terms verbally, but then later quote you at higher numbers in the final contract.

Verbal agreements do not carry much weight in a legal battle, so it is important to make sure that everything you need to look out for is included in the paperwork, including provisions for the option to refinance the loan in the future if this would be desirable.

So why is this relevant to you? Right now interest rates on mortgages and home loans are at near record lows with discussions of moving the interest rate on some loans to 2% to address the housing crisis. Historically speaking, since banks cannot grow money as rapidly when interest rates are so low, incidents of predatory lending and even small tricks to get the borrower to pay more will be on the rise.

How Can You Avoid Predatory Lending?

A very useful piece of advice is to remember the old adage "If it sounds to good to be true, it is." Take this for example: purchasing a new $650,000 model home with only 5% down payment and payments under $800 per month. Boy oh boy, that does sound like a great deal, eh?

Well what they neglect to tell you is that this is a cleverly worded form of financial entrapment that will put you into a state of indentured economic servitude for decades to come.

Here is what you can do to avoid any type of predatory home loan contract:

1. Do not allow there to be any sort of penalty for prepayment. This is a typical trap used to lure in people with subprime loans and low down payments, where the bank will charge a large amount of money if you try to refinance the loan.

2. Hire a home inspector to check out the property you want to buy. If there are any concerns about repairs, you can put in writing that either the seller or the bank will need to be responsible for the repair cost, or you can use this as a bargaining chip to lower the price.

3. Consult a real estate agent or attorney before signing any kind of binding contract. A binding contract, once signed, can put you into a very unpleasant situation.

4. Do not buy a house that costs more than you can afford. Not only can this end up in potential foreclosure, but you will not be able to enjoy your new home due to financial stress.

5. Be sure to use overall discernment. If you feel uneasy about signing, don't.

When you make an offer on a piece of real estate, it is always a good idea to include a clause about third-party financing and a long enough amount of time until the closing date. This way you can take your time to compare different loan offers, and also look over all the paperwork carefully to make sure you are getting the best deal.

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