Six Tips to Identify a Predatory Lender

Predatory lenders have wreaked havoc on unsuspecting homeowners as well as on our global economy.  The slumping real estate market necessitates that you protect yourself from predatory lending, now more than ever.

The loan modification market has been a hunting ground for predatory lenders.  For years, unethical lenders, mortgage brokers, and home improvement contractors have extended bad loans to unsuspecting borrowers.  The result is that both homeowners and the country alike are now on the verge of financial ruin.  

If you're pursuing a mortgage refinance, keep in mind these simple tips to help you avoid predatory lending.

1.  Pressure equals predatory lending. The hallmark of an unscrupulous lender is the pressure sale.  If you're in the process of a mortgage refinance, and a lender tells you that this is the last chance you have for a mortgage loan, get out of the deal.  Shop around-there are many other lenders out there.

2.  Signing incomplete documents. The proof is in the paperwork, and if you're presented with legal documents that are incomplete or don't include dates, watch out.  To protect yourself, consider hiring an attorney to review your documents.  A few hundred dollars upfront could save you thousands down the line.

3.  Costs change at the last minute. It's the old bait-and-switch sale.  A broker or lender will entice you to agree to a loan, and then right before closing, he'll inform you that the conditions of the deal have changed.  You should always refer to your Good Faith Estimate regarding the terms of the loan.  If the numbers vary significantly, don't take the deal.

4.  Inaccurate appraisals. To ensure that you qualify for a loan modification, a lender may try to beef up the value of the home loan appraisal.  This maneuver is not only against the law, it could leave you underwater if the market continues to tank.  Make sure that the value of the appraisal is in line with other homes in the neighborhood.

5.  Use your home as a debt solution. If you have problems with money management and find yourself deep in debt, beware the lender who convinces you to use your home as an ATM machine.  The only way to solve your debt is to change your behavior, not to borrow more money.  

6.  Anything but a fixed-rate loan. As victims of the subprime lending fiasco will tell you, avoid adjustable-rate mortgages and balloon loans at all costs.  These mortgage loans were very attractive when home values were steadily appreciating, but when prices decline, they can be catastrophic.  If your interest rate adjusts to a higher number but your home's value drops, you may find yourself unable to afford the new payment.  

The mortgage refinance boom included a heavy dose of predatory lending.  Consumers willingly agreed to these loans, believing that their home values would perpetually rise.  Recent events have indicated that ignorance of economic fundamentals will come back to haunt you, so beware of predatory lending practices.