Bad Credit Borrowers Beware: Six Signs of Predatory Lending

Bad credit mortgages exist. Those with poor or little credit history can get financing for their homes through many legitimate channels. However, those with poor credit (or subprime borrowers) are often targeted by predatory lenders. Predatory lenders exploit the desperation and naiveté of those seeking bad credit mortgages by making overblown promises, “creative” mortgage solutions and other “too good to be true” offers. Be on the lookout for some of these common signs that you are getting a raw deal:

Hidden Loan Fees

Predatory lenders may try to trick you into signing up for a seemingly low cost mortgage, but surreptitiously incorporate hidden fees that are financed and rolled into the cost of the loan. Because you don’t pay these fees up front, you may miss them. Typically, loan fees are less than 1 percent of the loan amount. Predatory loans can have fees that are up to 5 percent of the total amount. While there are legitimate practices that can get you lower interest rates, such as discount points, higher than usual loan fees with no explanation should raise instant red flags.

Excessive Prepayment Penalties

It is not uncommon to charge a penalty fee for prepayment of your mortgage, especially if your mortgage lender agrees to cover some of the origination fees and other upfront costs. However, some predatory lenders use prepayment penalties to prevent subprime borrowers from refinancing once their credit score improves.

Yield Spread Premiums

Some mortgage brokers get a kickback from mortgage lenders called a yield spread premium (YSP). Essentially, the lender pays the mortgage broker more money for bringing them a loan with a higher interest rate. This effectively inverts the loyalties of the broker - instead of working for you to find you the lowest interest rate, they now have a vested interest in selling you a mortgage with a higher interest rate when a less expensive option may have existed. Ask your mortgage broker if they are paid via yield spread premiums before doing business.

Repeated Refinancing

When interest rates drop or your financial picture improves, mortgage refinancing can save you money over the long run. But repeatedly refinancing to chase marginally lower interest rates will only cost you in lenders and brokers fees. Before refinancing, make sure the long term benefits are truly worth the upfront costs.

Mandatory Arbitration

Watch for a clause in your loan contract that mentions mandatory arbitration. If you sign a mandatory arbitration agreement, you are prevented from bringing a lawsuit against your broker or lender in a court. Instead, you must work out your dispute in an alternative forum, where decisions may not be binding or enforceable.

Asking You to Lie

Always be completely honest on any loan applications, statements or disclosures. If a mortgage broker asks you to fudge the facts or fib even just a little, it’s likely bad news. If you lie under the advice of a mortgage broker, you are the one who pays the price in the end, since it’s your signature on the contract.

Conclusion

These are just a few signs of predatory lending. In general, avoid entering into any mortgage where you don’t fully understand the terms. Take time to educate yourself on legitimate forms of bad credit mortgages. Ask for referrals and comparing several offers from different mortgage lenders and brokers. And if something seems too good to be true, it’s probably not. Keep this in mind while you shop for mortgage loans.