STEP 3:
Protect Yourself Against Predatory Lending

Learn the facts and minimize your risks
Like anything else, if the terms of a loan sound too good to be true, then they probably are. This is most important to borrowers with less than perfect credit, elderly borrowers, or lower-income and first-time homebuyers who are sometimes targeted by predatory lenders.
Protect yourself from spending too much or becoming a victim:

• Know what you can afford. This rule cannot be stated often enough. Calculating the amount you can afford for your down payment, closing costs and monthly mortgage payment, property taxes and insurance is the best way to protect yourself against bad lenders or real estate agents who may try to push you to spend more than you can afford. As a rule of thumb, your monthly mortgage payment (including taxes and insurance) should not exceed 38 percent of your total gross monthly income.

• Learn the risks and responsibilities of getting a mortgage. Educate yourself about interest rates, allowable fees and mortgage points. In addition, learn how to protect yourself against predatory lending practices. Doing so will minimize your risk of falling prey to various unscrupulous lenders peddling unaffordable “adjustable rate mortgages” or ARMs that start with low rates but balloon into much higher rates, greatly increasing mortgage payments.

• Ask the right questions when applying for a mortgage. For example, ask your loan officer if the loan being recommended for you has a “prepayment penalty.” If so, ask if there are any other programs you qualify for that don't require a prepayment penalty – borrowers should avoid such fees whenever possible. Ask if your loan contains a “mandatory arbitration clause.” This could be potentially devastating to a borrower as it will drastically limit your ability to seek remedies if the loan contains abusive or illegal terms.

• Arm yourself with factual information. Freddie Mac has established a ‘Don’t Borrow Trouble’ campaign designed to fight predatory lending with programs in local communities across the U.S. Check to see if a program exists in your community.

• Know your rights. With a little homework and some help from a real estate agent, you can avoid the problems many consumers face when trying to get a mortgage loan.