The credit marketplace appears to be highly competitive for consumers who are thinking about buying a home or refinancing an existing home loan. Mortgage loan rates can often be found in most newspapers and on the Internet, making it easier to comparison shop. But, for consumers with low or irregular income, tarnished credit reports and limited financial knowledge, finding an affordable loan can be a difficult task. These consumers oftentimes turn to more marginal or "sub-prime" sources for their credit.
Home loans are available in the sub-prime market, but borrowers will pay more for the loan. There are sub-prime mortgage lenders who may charge points and origination fees in excess of 10% of the loan amount and then finance those fees at high interest rates. In addition to paying more, the sub-prime borrower may be subject to the following predatory practices:
- Excessive Mortgage Broker Compensation. In the sub-prime market, there are mortgage brokers who will attempt to sell the borrower on a loan with the most fees and highest interest rate possible so that he/she will get more compensation. Some of these brokers may charge fees of 8 to 10 points. That means that on a $100,000 loan, the borrower is paying and financing an additional $8,000 to $10,000.
- Excessive Points and Fees. Most borrowers can expect to pay a 1% origination fee and possibly another 1% of the loan amount in points, as well as basic closing costs, which would include appraisal and attorney's fees. Some predatory lenders load up loans with these up-front charges and charge additional "junk fees" to pad the closing costs.
- Sell the Monthly Payment. Many brokers and lenders advertise "bill consolidation" home equity loans. Predatory lenders encourage consumers to pay off all their debts by consolidating them into one home loan with the promise to reduce the monthly debt payment. The problem with this is that the consumer is trading short-term debt for long-term debt. Instead of paying off consumer credit bills in three to four years, the new consolidation loan will take 15 to 30 years to pay off. To avoid becoming a victim, consumers must look beyond the monthly payment and analyze all the terms of the loan.
- Balloon Payments. Another way for a predatory lender to reduce the monthly payment on a home loan is to have the borrower pay off only the accrued interest each month. This method of financing will result in a huge balloon payment at the end of the repayment term, usually after 15 years. If the borrower is elderly, it will be very difficult to refinance the loan, and foreclosure may become inevitable.
- Equity Stripping. An unscrupulous lender targets consumers with a significant amount of equity in their home and offers to lend an amount that is more than the borrower can financially handle. The borrower defaults and the lender then forecloses and sells the house, stripping the homeowner of all the equity he has earned over the years.
- Flipping. This occurs when predatory lenders encourage consumers to repeatedly refinance their loan. Each time the loan is refinanced the lender charges more fees, placing the borrower further in debt over a longer period of time.
Before doing business with a mortgage lender, check with the Better Business Bureau.