PREDATORY LENDING RED FLAGSExcessive FeesLook out for excessive and - PDF document

1 PREDATORY LENDING - RED FLAGSExcessive F
PREDATORY LENDING - RED FLAGSExcessive FeesLook out for excessive and/or unnecessary fees.Loanfees should be no more than 3% (e.g.,$3,000 on a loanof$100,000).Fees over 5% ofthe loan amount areexcessive.Ask your broker or lender to show you anitemization ofthe loan amount with all fees explained.Excessive Mortgage Broker Compensation (YieldSpread Premiums) LISAMADIGANILLINOIS ATTORNEYGENERAL Looking for aHome Loan?How to AvoidPredatory MortgageLending and Get aLoan You Can Afford. ©neighborhoods.chicago.il.us haatt iiss PPrreeddaattoorryy MMoorrttggaaggee LLeennddiinngg??A predatory mortgage is a needlesslyexpensive home loan that provides no financialbenefit to the borrower in return for the extracosts.In many cases,homeowners are deceivedabout the loan's true costs and terms or are pres-Many ofthese homeowners lose their homes toforeclosure.Ifyou're in the market for a home loan,here aresome questions you should ask and commonpredatory lending practices ofwhich you shouldbe aware.The information in this brochure is byno means complete.Always have an attorneyreview all loan documents before you sign them.Ifyou cannot afford an attorney,you shouldbring all ofyour loan documents to a HUD-certified housing counseling agency for review.Resource guides to housing counseling agenciesin the Chicago area and downstate Illinois areavailable on our Web site,www.illinoisattorney-general.gov,or by calling 1-800-386-5438.The mortgage loan amount is the amount ofmoney you are borrowing.When buying a home,this amount is usually the price ofthe home plusany fees and minus your down payment.Ifyouare refinancing,the amount ofyour refinanceloan should be the payoffofyour current mort-gage plus any fees.A refinance loan could alsoinclude any other debt you are paying offwithyour home loan or cash you receive at closing.You should be cautious when deciding whetherto pay offother debt,such as credit card debt,with the proceeds ofa mortgage loan.Doing sowill increase your monthly payment and mightmean foreclosure ifyou are not able to makethat payment.Loan terms are generally 15,20,30,or 40 years.The longer the term,the more you will pay ininterest over the full term ofthe loan.Someloans are structured so that you do not com-pletely pay them offduring the term ofthe loan.With this type ofloan,you are obligated to payoffthe remaining balance,or balloon payment,at the end ofthe loan term.Beware ofmort-gages containing balloon payments! Ifyou donot have the funds or the ability to refinance theballoon payment,you could lose your propertyto foreclosure.You need to know your total monthly paymentamount to decide whether you can afford a par-ticular loan.Just because a lender says you quali-fy for a certain loan amount does not mean thatloan would be affordable.Some loan productsoffer "teaser rates"—low interest rates for ashort period that later increase,resulting in sig-nificantly higher monthly paymen

2 ts.Other loansallow borrowers to choose
ts.Other loansallow borrowers to choose among severalmonthly payment options during the loan term,but some ofthese payment amounts may be toosmall to cover the interest or to pay down theamount owed on the loan.This means that,overtime,you will actually owe more money to thelender than you owed at the start,even aftermaking payments every month.When the lender tells you the “monthly principaland interest”payment,it does not include theamount you need to pay every month for prop-erty taxes and insurance.All mortgage loanscontain a requirement that the borrower payproperty taxes and insurance.Ifthe monthlypayment that your lender quotes does notinclude a portion for property taxes and insur-ance,you need to add in those costs to deter-mine your total monthly housing payment.Beware:Unscrupulous brokers or lenders willquote a low monthly payment and fail to includethe cost ofproperty taxes and insurance whendescribing what the monthly payment will be.The rate can be a "fixed rate," meaning that itremains the same throughout the entire term ofthe loan.There are also variable or adjustablerate mortgage (ARM) loans where the interestrate can change during the loan term.Often,anARM offers a lower interest rate at the beginningofthe loan term,which results in a lowermonthly payment.However,the interest ratewill almost always increase,and you will thenhave a higher monthly payment that you may notClosing costs may be difficult to spot becauseoften they are paid from the loan that you aregetting and not out ofyour pocket—but youare still paying them! Make sure you understandwhat each fee is and to whom the money isbeing paid.Ask for a "Good Faith Estimate" ofyour loan's closing costs—your lender is requiredby law to give you one within three days oftak-ing your loan application.Ask ifthey'll guaranteeit in writing and whether the extra fees are nego-tiable.Mortgage brokers are paid for helping a borrow-er obtain a loan from a lender.A reasonablecompensation for this service is 2% ofthe loanamount (e.g.,$2,000 on a $100,000 loan).Themortgage broker may also get a "yield spreadpremium" from the lender.This is a bonus thebroker receives from the lender when the brokerplaces you in a mortgage at a higher interest ratethan you deserve.When this happens,the mort-gage broker is being paid twice:the borrowerpays a loan origination fee,and the lender pays ayield spread premium.You should be sure thatyour broker is not collecting excessive fees fromyour loan transaction.A prepayment penalty is a fee you will becharged ifyou pay offyour loan early.Often,alender charges a prepayment penalty in exchangefor offering you a lower interest rate.Ifyourloan has a prepayment penalty,you should askyour lender what the difference would be in theinterest rate you would receive on the loan withand without a prepayment penalty.You want tomake sure that you are receiving a benefit inexchange for the prepayment penalty