November 16, 2020
By Rahul Iyer
Predatory lending isn’t as common today as it was before the 2008 housing crisis, but it still exists. Understanding what to look for (and not accept) will prevent you from being taken advantage of with predatory lending.
By definition, predatory lending includes any unfair or unscrupulous tactics used to get you to take a loan that you can’t afford. The loan may have excessive costs, unfair terms, or other unfair aspects that many borrowers don’t realize.
Here’s what to look out for to avoid being taken advantage of with predatory lending:
Don’t fall for ‘too good to be true’ deals. If something seems off, it probably is. If a lender promises to get you the ‘best’ deal despite your low credit score or they promise to get you an approval and close your loan in a few days – it’s not possible. The lowest credit score most lenders can accept is 580 and all loans take 30 – 45 days to close.
Not receiving adequate disclosures. If the lender seems to hide the costs or doesn’t openly answer your questions about a loan’s cost, don’t fall for it. By law, you’re entitled to a Loan Estimate three business days after you apply for a loan. The lender must disclose ALL costs on the Loan Estimate and it should match the Closing Disclosure when you close. If not, chances are you’re being taken advantage of.
Ignoring your current debts or credit score. If a lender doesn’t seem concerned with your current credit score, debts, or income, they are likely a predatory lender. They will charge you crazy high-interest rates and upfront fees so it’s impossible to pay it back. They’ll then foreclose on your home and make the money back by selling your home.
Requiring electronic payments. Lenders can OFFER electronic payments, but not require them. If a lender states the only way to pay your mortgage is electronically, run the other way. They are likely a predatory lender and/or trying to steal your bank information.
Not reporting to the credit bureaus. Ask lenders specifically if they report to the credit bureaus. If they don’t, it’s a sign of predatory lending. Most lenders are in the business of helping you build your credit score. This only happens if they report your account to at least one credit bureau. If they don’t, look elsewhere.
Even if you have poor credit or a low down payment, you don’t have to be taken advantage of by predatory lending. There are reputable loan programs for everyone.
If you have poor credit or a low down payment, we suggest you take the time to fix it before applying for a loan. The higher your credit score and the more money you have to put down, the better terms you’ll get.
If you can’t, don’t settle. Look for a lender that offers fair terms, has reputable reviews, and has at least an ‘A’ rating with the Better Business Bureau.