Avoid Predatory Lenders
Lots of dishonest, aggressive, lenders advertise their loans to homeowners in financial need – people who have fallen behind on property taxes, need money for medical bills or need costly home repairs. Instead of offering a fair loan, these lenders use smooth-talking salespersons whose loans carry high interest rates, outrageous fees, and unaffordable repayment terms. They can trick you into taking out loans that you cannot afford to repay. Some people even lose their homes to foreclosure. That’s a high price to pay for choosing the wrong lender.
Spotting a Dishonest Lender
Be suspicious of anyone who offers you “bargain loans,” whether they mail or email you an offer, call you on the phone, or come to your door. Avoid salespeople who promise “No Credit? No Problem.” A bad loan is a costly mistake. Beware of offers that are only “good for a very short time.” Be suspicious of anyone who contacts you first – most good mortgage lenders or credit companies don’t solicit business over the phone or just show up on your doorstep.
Avoid lenders who call you and promise guaranteed, low-interest loans, who take applications over the phone, or who offer next-day approval if you pay them some money today. Say “No” to lenders who ask for up-front fees “to cover the first payment and other expenses.” Why? Because they never intend to give you the actual loan – they just take the up-front money and run.
Finding an Honest Lender
Shop around
If you need a loan, start by asking local banks, credit unions,
or mortgage companies. Whether you borrow for home repairs,
medical expenses, or to consolidate your debt into a single
monthly payment, compare the total costs of the loan as well as
interest rates. Points and fees and complicated. Study them until
you understand them.
Be cautious: A loan with a lower monthly payment is not always the better deal; it may have a high balloon payment that is due in a few years. Call or visit local housing counseling agencies that offer counseling on how to find a fair loan.
Ask questions
Before borrowing money, know exactly what the lender is offering.
You have a legal right to have – in writing – the
total cost of the loan, the annual percentage rate, the monthly
payments, and how long you have to pay back the loan. Always ask
questions until you understand everything. Ask the lender to
explain all fees and points. When you borrow money, it is
important to compare more than the monthly payment. Remember that
credit insurance – such as life insurance to pay off the
loan if the homeowner dies – can have a very high premium
and only protects the lender, not you. Once you’ve narrowed
down your choices to a few lenders, check with your state
attorney general and ask if there have been complaints against
the companies.
Before signing
Avoid “balloon” payments
One way that lenders make loans sound very good is to make the
monthly payment small but then require a big balloon payment at
the end of the loan period. Some loans have you wait to repay the
entire loan amount until the loan term ends. Dishonest lenders
may promise to help you refinance when it comes time to pay it
off, but watch out! This promise may be just a way for the lender
to charge you higher fees and closing costs. Predatory lenders
make money by charging excessive fees every time they refinance
the loan and they’ll encourage you to refinance often.
In the worst case, you can end up owing more money than the house is worth. AARP has helped several homeowners sue fraudulent lenders when the homeowners lost their homes (or were about to) because of many high priced refinancings.
Consider reverse mortgages
If you are 62 or older, a reverse mortgage may be better than
getting a home equity loan. A reverse mortgage, which is based on
the equity you have built up in the house over time, gives you
money that you don’t have repay until you move, sell the
house, or die. You can choose to get the money as a lump sum
payment, a monthly income, or a combination of both. If you get a
reverse mortgage, you can’t lose your house to foreclosure
the way you could with a home equity loan.
Since a reverse mortgage uses the equity in your home, you need to consider your options carefully. For instance, if your home does not continue to grow in value after you take out a reverse mortgage, you may have less of an estate to leave your heirs.
Read everything carefully
Whenever you borrow money, don’t sign anything you
don’t fully understand. Always assume that any paper you
sign is a contract. You can insist on changing anything in a
contract that you don’t like or can’t agree to. If
the lender won’t change the contract to your satisfaction,
get a loan somewhere else. Some predatory lenders dramatically
change the loan terms at the last minute from what you thought
you were promised. Before you sign the loan papers, ask a lawyer
or trusted friend to go over them with you. Don’t sign a
document with blank spaces; all spaces should be filled in before
you sign.
After You Sign
You can change your mind
You can back out of getting a loan any time before you sign. Stop
the loan process if a new development surprises you until you get
answers you need,. If you’ve already signed a contract that
uses your home as security, the Truth in Lending Act allows you
to change your mind, for any reason, within three business days
of signing the contract. If you change your mind, put it in
writing and mail to the lender.
Get help if you think you have an unfair loan
Contact your county office of consumer affairs or your state
Attorney General’s office. You can find their numbers in
the blue (government) pages of your phone book. If you are a
victim of bad loans, let others know. You can help stop predatory
lenders from victimizing someone else. Report the fraud to the
Federal Trade Commission.
AARP Resources
Reverse
Mortgages
AARP offers extensive information on tapping into the equity in
your home for funds. Click on Loan Calculation under the Tools
section on the upper right top of page to figure out finances. Or
click on “Home Made Money” for a handbook on all you
need to know about reverse mortgages and where to find them.
AARP in Court
Read how AARP helped a West Virginia woman fight a predatory
lender.
$60 Million Settlement with First Alliance Mortgage
Company
The settlement, awaiting approval by a federal court, is expected
to return $2,500 to $3,300 each to 18,000 First Alliance
borrowers in 18 states and the District of Columbia.
 |
Because your Money Matters, get more tips and action steps on Mortgage Payments - PDF file |
Additional Resources
Federal
Trade Commission
Federal Trade Commission cautions homeowners to be on the lookout
for home equity scams.
Community
Reinvestment Association of North Carolina
The Community Reinvestment Association of North Carolina has an
online handbook that uses a true story of how a homeowner
borrowed money to make some home improvements and ended up a
victim of predatory lending. This site also shows you what to
look for in a loan document.
National Consumer Law Center
National Consumer Law Center has detailed information on how to
spot home loan scams.
