How to Avoid Making a Deal with a Predatory Lender
It's no secret that some home loan lenders are just, well, shady.
As a mortgage company, we get it. In this industry, there are some people you need to stay away from. With the possibilities of taking a hit to your credit score, foreclosing, or facing other financial problems, stumbling into a predatory lender can leave deep scars. It can be especially frightening for first-time homebuyers who haven't interacted with lenders before and may not be sure what to expect. And with so many lenders begging for your attention, it's hard to pinpoint where exactly the sweet-talkers are.
As a borrower, you should be able to work with lenders who have your best interests in mind, or, at the very least, who you can trust. Read our tips to help you confidently navigate the world of mortgages and mortgage lenders—and find a lender that will help you get into the right home with the right deal, sans shadiness.
#1 – Talk to Multiple Lenders
One of the most important things to do as a smart borrower is to shop around before making a decision on a specific loan or lender. Considering the life-changing nature of a mortgage, going with the first offer you get is a bad idea.
Whether through a salesman or your own research, you might find a lender offering what seems like a great deal when in reality, you're dealing with a predatory lender. You'll want to know whether the terms, rates, and fees of the deal are similar to those offered by other lenders for a similar loan type. Talking to multiple professionals will give you a picture of the general price range.
And if you find that you're dealing with an outlier that's too good to be true, you'll want to investigate further.
#2 – Steer Clear of Lenders Who Try to Pressure You
If you're working on taking out a loan with a lender and are feeling pressure to do certain things, this is cause for alarm.
Pressure from mortgage lenders can come in different forms. An offer may come with a time limit of a few days for you to make a decision. A predatory lender may try to convince you to add products to your loan that you don't need or sign documents you don't understand or that are blank. They may strong-arm you into taking out a very risky loan. Or, they may push you toward a house that is more than what you can afford or would like to spend.
If a lender is using short time limitations or pressuring sales tactics, don't feel like you need to act on their timeframe. Doing so could end badly. A good lender understands that this is likely the largest purchase you have made in your life. Finding the right mortgage takes time.
Ask questions, and if they go unanswered, don't be afraid to look for another lender.
#3 – Pay Attention to the Loan Estimate and Closing Costs
Lenders are required by law to give you a loan estimate (LE), which tells you how much you can expect to be charged for different parts of the loan. At closing, costs should be pretty similar to what the LE stated. If they aren't and it's not in your favor, you may want to backpedal on the loan.
Until 2015, lenders needed to provide a good faith estimate (GFE), but now, you'll need an LE instead.
And if you don't receive a LE within three business days of the lender receiving your application or at any point during the loan process, that is a big red flag (and illegal).
#4 – Question Rates and Fees that Don't Make Sense
Sometimes, a predatory lender will get you to talk with them by offering you a stellar rate and then changing it later in the process. Or, they may actually give you that low rate, but treat you unfairly in another area, like by charging too much in fees.
Requests for excessively high or low interest rates, high fees, or other unnecessary payments are reasons for you to be wary. More reasons to consider investigating a lender or loan further include prepayment penalties, not being allowed to purchase points (or being offered overly expensive points), giant insurance rates, large broker's fees, and balloon payments. Ask the lender to give reasons for unusual rates or terms, and always check on the offers of other lenders.
#5 – Avoid Lenders Who Encourage Dishonesty
You should be very worried if you have a lender who is asking you to lie or "exaggerate" on an application. Putting false information on a mortgage application is a crime, so don't agree to it. The lender may seem like they have a good reason, but it is illegal nonetheless.
What's more, falsifying home loan information can really harm your life situation. True, it may help you get the loan you are wanting. However, since qualifications and verification of certain information like employment, income, credit, etc. exist to make sure you are not taking on too big of a loan, falsifying information may end with you foreclosing on a loan that you can't pay for. A lender who allows or encourages this is certainly questionable.
In the same vein, you should be worried if the lender doesn't seem to care about whether you'll be able to repay the loan, disregarding low credit or other signs that normally cause lenders to be cautious.
Specific Tips for Veterans
There are a few protections in place for veterans that can reduce their chance of coming into contact with a predatory lender. Caps on interest for veterans and laws that specifically protect veterans taking out VA loans, like the Military Lending Act, are among these protections.
Sadly, however, predatory lenders still target veterans. Although VA loans are insured by the government, they're offered by private lenders. This leaves ample room for the same dishonest behavior that exists in many pockets of the mortgage world to exist in the VA lending world.
Veterans should be wary of offers in the mail, by phone, in person, etc., promising things that are too good to be true. These sometimes claim to be from the VA or IRRRL and can look official. Don't pay anyone over the phone or in response to an offer, and make sure to research the firm and speak with other lenders before moving forward. Additionally, veterans should also consider the five tips listed above when taking out a VA loan.
Don't be Fooled by a Predatory Lender
No one wants to be tricked by shady lenders, and it is often possible to avoid it. When searching for a mortgage, look for an established lender with good customer reviews. Also, make sure that they are patient with your decision and can offer you good, competitive rates. Keep an eye out for any of the red flags we've discussed.
As long as you are speaking to multiple professionals and know what to watch for, finding a mortgage can be an incredibly rewarding experience. Whether you're borrowing for the first time or the fifth, working with a quality lender can end with you reading, sipping tea, or doing whatever you like to do on the porch of your dream home.
For More Information
Whether you have questions on something your lender is doing that doesn't seem quite right, you want a bid on a loan, or you're wondering what kind of mortgage options work for you, we have a team of people with years of experience that can help. Visit our website or give us a call at 866-569-8272.