It will probably not surprise you that with the large amounts of money and paperwork involved in home equity loans, there are a few lenders out there who are dishonest and try to make a quick profit off of unsuspecting homeowners. Home equity loans can be a valuable tool in helping make your financial goals realities. It is important, however, that you understand exactly how the loan process works, what to watch out for, and how to prevent yourself from becoming a victim of real estate scams. Although most lenders out there are honest and will have your best interests at stake, there are a small number who will try and take advantage of you. It is up to you to know the signs of real estate scams so you can be successful in avoiding them.
The purpose of this article is to inform you of the most common real estate scams pulled involving home equity loans. After describing each scam, you will be given some pointers to help you avoid falling into them.
One of the most obvious things to know about home equity loans is that fact that they have to be repaid. If you are not certain that you have enough income to keep up with the monthly payments, this is something you have to address with your lender before you make any commitments. Always be honest about your monthly income when applying for a loan. Falsifying this information is called loan fraud, and it’s illegal. If a lender tells you that it’s ok to exaggerate anything on a loan application, this should be a warning sign. If you get a loan and are unable to keep up with the payments, the lender will be able to take your house. This is commonly known as Home Equity Stripping scams, as the lender will literally strip you of your home after you default on the loan. The best away to avoid falling into the trap of home equity stripping scams is to simply tell the truth. If a lender tells you it’s ok to make a false statement about anything on your application, be aware that it is not ok, and you could face serious consequences if you get caught.
Another home equity scam to be wary of is called Home Equity Flipping. This when a lender encourages you to constantly refinance your loans at what they claim to be better rates each time, only to then hit you with additional fees and interest for each new loan. This scam can sometimes take a longer period of time to unfold, but it’s often hard to detect since the lender gives you the impression that each time you refinance your loan, you will get a better deal. Since the interest and debt will keep adding up, eventually this scam can cause you to lose your house. The lesson here is to always make sure you know what the rates and fees are when you refinance, and to be alert if your lender approaches you with a new refinancing plan very soon after you do it the first time. To avoid this scam, be knowledgeable about loan rates when you’re applying, and throughout the duration of the loan, stay up to date on these rates. This way if your lender contacts you saying you should refinance, you will be up to date on the interest rates yourself and will be able to know if you’re going to get a better deal or not.
Construction projects around the house also need to be planned very carefully. When looking for a contractor to do the work, make sure you hire someone who is respected within the industry, and has received praise from previous customers. A common real estate scam with contractors is when they agree to help a homeowner find a lender who will help them finance a project, even if the homeowner does not have enough money. The contractor and a lender he knows will then offer a financing plan that sounds good and make the homeowner hastily sign papers. It turns out these papers were actually for a home equity loan with high rates, that you are now required to pay off. In many of these cases as well, the contractor does a poor quality job, leaving the homeowner with large amounts of debt and frustration. This is known as a Home Improvement Scam. It is very important to work only with contractors you trust and have good reputations. Don’t trust a major project to an untested contractor. If you are new to an area, ask your neighbors whom they recommend.
Another home equity scam to watch out for involves altercations in the amount you are required to pay on your mortgage after the terms have been agreed on. The lender will agree on a certain rate for your mortgage, but soon after that, you receive bills for additional services that the lender did not mention would be included. Since you have already signed for the mortgage, the lender says that failure to pay these additional fees will result in default. These practices are known as Loan Servicing Abuses. In order to avoid this scam, know exactly what you are signing for when you do the paperwork. Find out every single fee and service charge you will be required to pay before you sign for the loan and write them down. It’s much easier to negotiate through these before you agree to the loan.
Similar to the loan servicing abuses mentioned above, is a scheme called Credit Insurance Packing. This is when you and the lender agree on certain loan rates, but right as you are signing the final papers, the lender gives you additional forms to sign for services that you didn’t not ask for. The lender hopes you will not notice these additional fees, but if you do, they respond by telling you that you have to sign for them, or the loan may have to be re-approved. They hope that by saying this, they can scare you into thinking the loan will not get approved the second time around and you will sign on for the additional fees. Again, like the loan servicing abuses scam discussed above, make sure you know exactly what you are signing on for, and what you will be required to pay each month. If a lender tells you a loan might need to be re-approved after you have signed for it, ask to speak to a manager in regards to it, and if you’re still not satisfied, then take your business elsewhere.
The final home equity pitfall that you should watch out for is not exactly known as a real estate scam, but rather a loan that forces you to repay almost all of it at the end of the loan life. If you are falling behind on your mortgage payments and a lender offers to help you refinance the loan in order to make the payments easier, you should approach with caution. Make sure when you sign up for the new loan that you are making payments on the actual loan every month, and not simply paying off the interest. Loans in which you only pay off the interest every month are known as Balloon Payments because at the end of the loan period, you are required to repay the entire loan all at once. While these loans are legitimate, the lender may rush you through the paperwork and hope that you do not pay attention to all the details of the repayment. If you cannot make the large payment at the end, the lender can foreclose and take your house. Make sure before you sign for a loan you know the exact details of how the loan is to be repaid and any additional charges that may be tacked on. Unless you know you will definitely have a large amount of money at the end of the loan, balloon payments should usually be avoided.
After reading all this, you might be thinking twice about applying for a home equity loan, but it is important to remember that there are many ways that you can avoid being a victim of a real estate scam. Take time to read the fine print, and don’t let a lender or anyone else rush you through the process. If you have any questions, or if something is not crystal clear: ask the lender before you sign for it. Make sure you know what you can afford as far as repayments go, and never provide any false information on an application. If offers of extremely low rates, or certain amounts of cash back sound a little too good to be true, then they probably are. Most importantly, know exactly what you are signing for, and what every form means. It also helps greatly to work with a lender you know and trust, or at least one who other people have recommended to you. After the paperwork is completed, keep copies of everything, so in case something goes wrong, you’ll have a record of exactly what you signed for.
A home equity loan is a complicated process, but through careful planning and attention to detail, you can make the process much easier for yourself, and not have to worry about running into major problems along the way. So from home equity stripping scams to the credit insurance packing scam, one you know what to watch our for, you’re sure to bypass any scam that may come your way.