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How to Avoid Predatory Lending: Best Practices

Buying a home can be a wise investment with appreciating value. But the return on investment hinges on the terms of financing. As was learned all too painfully in the recent housing market collapse, there are unscrupulous predatory lenders who would be happy to ruin your financial security for some cold, hard cash.

Though the amount of predatory lending is now dramatically lower than it was at the height of the housing bubble, unsavory practices persist. Deceptive mortgage advertising is alive and well. There are still plenty of scams to look out for, and the stakes remain high.

Luckily, predatory lenders tend to have some common features we can use to identify the bad apples. Fuzzy facts, incomprehensible contracts and obscene interest rates—these are the telltale signs of a bad lender and a bad loan. Read on for best practices for filtering out the scammers.

Too Good To Be True

Responsible loans match the level of financing to the borrower’s ability to pay. The cost of the mortgage should not exceed the max possible value of the home. Borrowers should be able to afford the monthly payments, but also be wary of sweetheart deals that are just too good to be true. Some predatory lenders front with attractive monthly payments, while planning to make their money off exorbitant interest rates.

Know Your Red Flags

An overvalued mortgage is certainly a red flag, but there are numerous other clues that signify shady dealings. Make sure you examine the mortgage loan documents with a fine-toothed comb. Here’s what to watch out for:

  • Early repayment penalties
  • Fees for modifying loans
  • Late fees higher than 4 percent of the balance
  • Total mortgage cost greater than the home’s value
  • Adjustable-rate mortgaging
  • Unexpected balloon payments

Shop Around

If you’re not sure if the loan on offer is in the ballpark, don’t feel pressured into accepting it. Even if you are certain you like the terms, thank the lender, tell them you will consider their offer and continue shopping.

It’s possible the first loan you are offered is the best one, but you won’t know unless you collect several pitches. This is all the more important if a lender is using hard sales tactics to pressure you into signing. Remember: You can always walk away. Often, it’s the smart thing to do.

Start Local

Among the bands of brokers, banks and sketchy online mortgage vendors, it’s hard to know where to find a trustworthy lender. It’s a good idea to start local. Many buyers discover favorable deals at their own bank or credit union. Others connect with a quality broker after getting experience-based recommendations from friends and family.

For all your trustworthy mortgage and lending needs, we recommend Nick Marascia and the team at Guaranteed Rate located here in Dallas, TX. Visit their website or give them a call (214.845.4146) today.