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The practice of predatory lending is becoming more common in the mortgage industry today. As a home buyer, you need to watch out for some of the signs of predatory lending. Here are a few of the most common examples of predatory lending practices.
1. Emphasizing the Payment
One of the most common tactics that is used by predatory lenders is emphasizing the monthly payment instead of the other factors of the loan. There are all kinds of ways that a lender can manipulate the monthly payment to get it within your budget. This means that you should not be paying as much attention to the monthly payment as you should the other factors of the loan. You could potentially be signing up or something that devastates you financially just so that you can get a cheaper monthly payment for a while.
2. Balloon Loans
Another common predatory lending practice is the use of balloon loans. Balloon loans provide borrowers with a small monthly payment for the majority of the loan. However, the borrower is only making a payment to cover the monthly interest in most cases. This means that the principal of the loan is never addressed until the last payment. You will have to make one large balloon payment in order to retire the principal of the loan. Most of the time, no one prepares for this payment and basis foreclosure on their home.
Another predatory lending practices referred to as packing. This is when the lender packs extra things in with the loan without your knowledge. This is commonly done with insurance products that are not necessary to you. You will end up paying more for these products and they will not benefit you in anyway.
4. Excessive Points and Fees
Sometimes lenders will charge excessive points and fees on their loans in an attempt to bring in some more profit. One point is typically equal to one percent of the loan balance. These are typically used to buy down the interest rate on the mortgage. If a lender is asking you for more points than normal, this could be considered predatory lending. Many lenders will also pack in extra closing costs that are completely unnecessary as well. Watch out for these extra fees when you are working with a lender. Typically, you should be provided with a good-faith estimate within three days of applying for a loan. You should be able to look at this good-faith estimate and decide if the fees are honest or not.
5. Large Mortgage Broker Payment
Some individuals choose to work with a mortgage broker in order to find the best deal on a mortgage. There is nothing wrong with using a mortgage broker as they can sometimes be very beneficial. However, in some cases lenders will make an excessive payment to these mortgage brokers. This is done so that the mortgage broker will be influenced to bring customers to the lender. This is a disservice to the customers of the mortgage broker and it can get you in trouble with a loan that is not in your best interest.
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