Q:

How do people get scammed by home loans?

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Quick Answer

Predatory lending on home loans often includes excessive fees and points, inflated interest rates and loan approvals that exceed the appraised value of the home, explains the Center for Responsible Lending. Abusive or over-inflated prepayment penalties are another sign of predatory lending practices.

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Full Answer

Most predatory lending occurs in the sub-prime mortgage market, notes the Center for Responsible Lending. Consumers with average or poor credit scores do qualify for sub-prime mortgages that carry high interest rates and closing costs. Predatory lending practices include steering sub-prime borrowers into adjustable-rate mortgages in which the lender locks in the interest rate for the first two or three years. Once the initial rate lock expires, the borrower's monthly payment skyrockets.

The Real Estate Settlement Procedures Act helps protect borrowers from predatory lending, cites the Home Loan Learning Center. RESPA requires lenders to provide borrowers with a good-faith estimate of all closing costs during the initial application. RESPA also requires lenders to disclose any fees paid to mortgage brokers for processing the loans, and the act forbids any type of kickbacks to the mortgage brokers. RESPA is a consumer protection statute enforced by the U.S. Department of Housing and Urban Development. As of 2010, the Federal Reserve Board banned all yield spread premiums that lenders paid to mortgage brokers for processing loans.

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