hands over a house model

Protecting Yourself from Predatory Lending in Real Estate

Buying a home is a huge financial decision that involves a lot of money, and especially for first-time home buyers, the concept of handling that much can be a lot to digest. The average person will most likely apply for a loan or secure a mortgage, so they’ll only have to meet the down payment requirements.

However, as with all important financial decisions, one must always exercise caution. And regardless of how easy and seamless transactions have developed over time, a home buyer must always remain vigilant as these transactions naturally carry their own risk.

On that note, today’s discussion will revolve around predatory lending and how you can protect yourself from these dangerous situations.

Never Heard of Predatory Lending?

So, what exactly is predatory lending? According to Investopedia, it is defined as any unscrupulous action carried out by a lender to entice a borrower in taking a loan they are unable to pay. As the name suggests, these practices are predatory as they seek to exploit unknowing victims into loans with very unfavorable terms. Commonly, predatory lenders often target low-income families, older people, and the like by luring them with the facade of rock-bottom payments. And among the following are strategies they use:

  • Loan Flipping: Loan Flipping is when your lender encourages you to take successive cash-out refinancings. And while in good practice, taking a cash-out refinancing lets you pocket some money and enter a more favorable mortgage, “flipping” does the opposite. The predatory lender gets to pocket fees every time you do, and the buyer suffers from higher interest rates and prepayment penalties each time.
  • Prepayment Penalties: Home purchases and mortgage transactions usually come with their own prepayment penalties, and the value can sit anywhere around 2% of the total balance. However, in the case of predatory lenders, they will charge absurdly high prices for the prepayment penalty, pocket it as profit, and discourage borrowers from refinancing with so much money paid down.

These two predatory lending practices are just the tip of the iceberg, and their strategies can range from loan packing to balloon payments and more. So it is in your best interest to stay vigilant and learn how you can protect yourself.

porch of a beautiful house

How Do I Protect Myself?

In the realm of real estate, information is king. And especially as a home-buyer, you must equip yourself with the necessary knowledge about the home you plan to purchase and the mortgage you are taking. The 30 minutes or so you spend researching, reading, and consulting professionals can save you thousands of dollars. So do yourself the credit and take every step with caution.

  • Don’t Make Rash Decisions: Never forget that purchasing a home and financing a mortgage is YOUR DECISION alone, and no else gets a say on what you decide. With significant financial transactions, it is always best to take your time and not make rash decisions. And if the lender starts pressuring you into taking the agreement asap, then this is already a red flag to choose a different financing option.
  • Right of Rescission: If you think that your mortgage puts you under unfavorable terms and was predatory in nature, then you can enact your right of rescission. As long as you fall within three days of signing the contract, you have until midnight of the last day to cancel.

As much as possible, you must do your part to stay on the safe side of purchasing a home, and that includes doing your research on the mortgage you decide to get. However, if you’re already a victim of predatory lending, there are still methods of recovering.

What If I’m Already a Victim?

Just as you would contact the help of insurance attorneys with bad faith insurance, your first course of action should be to enlist the help of a real estate lawyer. In doing so, you will have the assistance of a professional to guide with you what’s to happen next and to take the necessary action to face this legal issue.

  • Take Legal Action: As a victim of predatory lending, you can report and sue the lender for their malpractice. Especially if your loan agreements violate specific laws, this can be used as grounds for a lawsuit. Pursuing one does come at a price, but you can collect upwards of twice the finance charges. On top of that, if the lender intentionally withheld information about the loan, they’re actions also count as fraud.
  • Refinancing: Another method of getting out of a predatory mortgage is refinancing under a new lender with more reasonable terms. And while predatory lenders will try to discourage you with the amount you’ve already paid in penalties, the cost long term is much better with refinancing your loan — lower interest rates, reasonable fees, and overall a better agreement.

Conclusion

Predatory lending is a glaring issue that exists, and many individuals face. So, stay vigilant when taking out huge loans, and act as a catalyst for information. Let others know what you’ve learned today and share these practices to keep them safe.

Scroll to Top