Predatory lending occurs when a lender targets a homebuyer with a "sub-prime" home loan. A "sub-prime" home loan contains excessive mortgage fees, unreasonable interest rates, or penalties and insurance charges. This sub-prime loan can raise the cost of refinancing by thousands of dollars, and lead to foreclosure. A HUD study showed that in Baltimore, sub-prime home loans are six times more likely to be used in poorer neighborhoods, and seven times more likely to be used in minority neighborhoods. It is a problem that is only getting worse.
It is important to note that a sub-prime loan is not necessarily a bad thing. The term “sub-prime” simply means that the loan does not meet the borrowers credit and property requirements of the loan company. As a sub-prime borrower you might have one or more of the following issues.
- Bankruptcy filing within the past seven years.
- Late payments on installment purchases, revolving credit, or other types of loans.
- Recent tax liens.
Still, sub-prime loans are far more likely than prime loans to be predatory. This is true because the individuals that fall within the definition do not have access to the prime market and are forced to use unscrupulous lenders.
Flipping occurs when a “flipper” targets a first time home buyer who believes he or she cannot afford a house or has bad credit. The “flipper” earns your trust by using his knowledge and experience with the home buying process to make the deal seem easy. The “flipper” promises to arrange a loan, take care of all the paperwork, and may even let you move right in before the sale. What you do not know is that the “flipper” bought the house cheap, made only cosmetic repairs, and is now selling it to you for a price that far exceeds its value. You now have a mortgage loan for the inflated sales price. The “flipper” walks away from the deal with all the loan money, but you wind up with a house that is not worth what you owe.
Important Protection Against "Flipping" for Low-Income Buyers
The Federal Housing Administration will not provide insurance for houses resold within 90 days of purchase. In order to prevent flipping, these rules require that a house be appraised again the re-sale price is 100 percent over the purchase price. In addition the new rules say that only those people that are named on the official record, such as a deed or title, can legally sell the property. This rule was designed to prevent the type of "flipping" that was taking place in Baltimore and other urban areas. The rule is important to low-income people because FHA insures almost all mortgages to low-income buyers.
Read the Regulation: 24 CFR 203.37
This document contains information from; Why First Time Homebuyers Need a Lawyer; by the Civil Justice Network, and; Unequal Burden Baltimore: Income and Racial Disparities in Sub-prime Lending; by HUD.