How to Avoid Predatory Lending

Most mortgage lenders and brokers have your best interests in mind. However, there are "predatory lenders" that may try to take advantage of you.

Although predatory lending is not defined by federal law and states define it differently, this type of lending usually involves loans with terms you can't meet – no matter how good the deal sounds – and practices that strip away the equity in your home.

Who do predatory lenders target?

Predatory lenders target elderly and low-income homebuyers, minorities and women, people with less-than-perfect credit, and people who know very little about home loans and mortgages. They often approach people they know are having trouble paying their mortgage with offers to refinance or "creative" mortgage solutions.

These lenders usually tell you that you can get loans with very low monthly payments, refinance your existing mortgage, or take out a loan or second mortgage to help pay for expenses like medical costs and home-improvement work. There are legitimate loans that can help with these things but be sure to research your lender and ask questions. A reputable lender will not mind answering all your questions. If in doubt, go over the loan with a trusted advisor before signing anything.

How can you spot a predatory lender?

Predatory lenders usually offer loans with excessively high interest rates; broker fees, unnecessary costs like pre-paid credit life insurance, and unaffordable repayment terms.

Be suspicious of anyone who offers you "bargain loans," whether they mail or email you, call you on the phone, or come to your door with an offer. Avoid promises of "No Credit? Bad Credit? No Problem!" and beware of offers that are only "good for a very short time." Anything that is "only good for today" is a bad idea.

Avoid lenders who encourage you to borrow more than you need or more than the value of the home. Beware of terms that change at the last minute or offer next-day approval based on prepayments or up-front fees.

Find a new lender if they encourage you to lie on your loan documents. It's not only illegal but a sure sign that you are putting your home at risk.

Helpful tips to protect yourself

1. Educate yourself. If you are a first-time homebuyer, attend a homeownership education course. HUD and a number of non-profit counseling agencies offer them – some are even self-paced online courses.

2. Check references. Be sure to know who you are working with. Before selecting a real estate professional or lender, get references and do your homework. Be wary if anyone is trying to dissuade you from comparing lenders and costs.

3. Know your market. Know the value of the neighborhood and check what comparable houses are selling for. This will help you protect yourself from paying too much for your home.

4. Get a home inspection. Hidden problems with the house can cost you thousands – it is worth it to spend a little and save a lot. Be sure to research your home inspector and not use one that a lender says can get you a “special deal” with.

5. Be truthful. Don't let anyone talk you into making false or incorrect statements on your application paperwork. They may tell you it isn't a big deal but it is – it's fraud and can result in legal action. In addition, lying may enable you to buy a house you can't afford and you may struggle to keep up with the payments and risk foreclosure.

6. If you don't understand, don't sign. Don't be afraid to ask questions or take the unsigned document to someone you trust to help you understand it better. Never sign blank documents – you will be bound by whatever you sign. Don't let someone tell you, "we'll fill that in later." Instead cross through blanks or write N/A in the spaces.

7. Understand the costs of the loan and what is covered. Your loan can include the actual amount you're borrowing, Private Mortgage Insurance, and closing costs. Make sure your loan is not "packed" with premium credit insurance add-ons that you don't understand or want (like credit life insurance).

8. Take your time. A reputable lender will not mind if you want to take the time to read everything thoroughly or ask a trusted family member or friend to review the documents with you. Don't be bullied into signing what you're not comfortable with.