Home buyers must avoid certain abuses when they take out home loans. The Federal Trade Commission (FTC) warns about:
- Equity stripping. This occurs when a loan is made based on the equity in a property rather than on a borrower’s ability to repay the loan. As a general rule, loans made to individuals who do not have the income to repay such loans usually are designed to fail. They frequently result in the lender acquiring the borrower’s home and any equity the borrower had in the home.
- Packing. Here, the practice of adding credit insurance or other “extras” increases the lender’s profit on a loan. Lenders often stand to make significant profits from credit insurance and, therefore, have strong incentives to induce consumers to buy it as part of a loan.
- Flipping. A lender may induce a borrower to repeatedly refinance a loan, often within a short time frame, charging high points and fees each time.
These practices generally occur in the “subprime” mortgage market so you need to be extra careful if you’re forced to shop for a high-rate mortgage because of prior credit problems.
