Bad Home Loans: How to Spot Them

Bad Home Loans: How to Spot Them
Getting a home loan is a major decision with serious consequences to life and financial health. In fact, a bad home loan can result in bankruptcy and loss of housing. Therefore, following these four tips will help prospective homeowners avoid bad loans.

Inaccurate Numbers
Some lenders will claim that is it acceptable to bend the numerical truth when it comes to income in order to get a bigger loan. While it may sound appealing, this is technically mortgage fraud. The Dodd-Frank Act of 2010 was signed into law in response to the financial and subprime mortgage crisis of 2007. As a result, certain unscrupulous lenders must now use advanced fraud techniques to get around the new legislation. For example, some lenders perform a bait-and-switch with their clients. This means that they will change the loan’s price, terms or interest rate. They target vulnerable clients who may be overwhelmed my mountains of documentation. This means that they will verbally promise certain conditions and then rush the client into signing a confusing amount of loan paperwork.

Failure to Disclose Documents
Home loan applicants should be wary of lenders who instruct their clients to skip over the details and ignore important documents. According to the Consumer Financial Protection Bureau (CFPB), there are required loan disclosures that must be shared with the homeowner. For example, new homeowners should receive the following federally-mandated documents before their loan closes: the loan estimate, the closing disclosure, the notice of the right to rescind and the initial escrow statement. The loan estimate is typically sent a few days after the lender receives the initial application. The closing disclosure is a key document that clearly explains all final loan terms and costs. There are also contractual documents such as promissory notes, mortgage instruments and state government documents.

High Pressure Tactics
Fraudulent lenders tend to engage in certain high pressure tactics. For instance, lenders may pressure their clients to agree to an expensive loan program that actually benefits themselves. They may also pressure clients to borrow more money than is actually needed. As a result, the new homeowner will end up paying more interest than what would be earned in interest if the money was properly invested. Lenders also pressure prospective homeowners with low incomes to agree to difficult financial terms. However, loan shoppers should clearly understand their current financial state. If necessary, they should consult with an experience accountant. Certain unscrupulous lenders may pressure their clients to sign or ignore blank forms. This is cause to worry because lenders could write in a clause that surrenders the home to them upon approval. Any blank signature spots should be crossed out and initialed. Finally, be sure to obtain copies of the completed paperwork.

Predatory Mortgage Lending
When shopping for a home loan, applicants should be aware of predatory mortgage lending tactics. First, lender’s fees should never go above three percent of less of the loan amount. Second, prepayment penalties that charge money for refinancing are a warning sign. These penalty periods can last a few years and cost thousands of dollars. Third, lenders try to make more money through increasing the interest rate above the actual charge. Therefore, be sure to ask the lender if the loan involves a yield-spread premium payment. Fourth, loan shoppers should carefully analyze ads or commercials for predatory targeting techniques. For example, ads that claim that bad credit doesn’t matter are suspicious and should be avoided. Fifth, be sure to clearly understand the range of adjustable-rate mortgages to avoid having to refinance a future unaffordable loan. Six, lenders who promise future loan refinancing should be shunned.

In review, there are standard techniques that crooked lenders engage in to defraud potential homeowners, such as inaccurate numbers, withholding documents, high pressure tactics and predatory lending techniques. The Department of Housing and Urban Development (HUD) offers step-by-step advice for buying a home here.

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