Purchasing a home is the most expensive investments you’ll ever make. At the same time, when strapped for cash, many homeowners are tempted to take out a home equity loan. When considering a home equity loan, it’s crucial to keep in mind that some home equity lenders are dishonest.
However, some home equity lenders (not all) are deceitful, and naive consumers are placing themselves in a risky situation. Therefore, you’re wise to be cautious – think “Buyer Beware” when taking out a loan like this.
Home Equity Scams
What types of borrowers are targeted by home equity scams? Using unethical lending practices, these types of lenders target the elderly, minorities, and those with poor credit.
One method used is “equity stripping”. In this case, the lender encourages cash-strapped borrowers to exaggerate their income on the loan application. The lender knows they can’t make the payment because of their debt to income ratio. When the borrower defaults on the loan, the lender quickly forecloses stripping the borrower of any equity in their home. If you’re encouraged to apply for a loan you know you can’t afford – step away. They’re not looking at your best interests.
Another method scammers use is the balloon payment. With this type of loan, a homeowner’s offered refinancing at a lower monthly payment. They’re only lower because you’re only paying on the interest. In the end, you’ll be responsible for the principle which is the entire amount of the loan and it will be due as a balloon payment, in a lump sum. If they can’t make the balloon payment, their home will be foreclosed on.
Another Deceptive Practice
Yet another deceptive practice is called loan flipping. The lender, who holds the mortgage, offers to refinance so you can get cash for your bills, an emergency, or for fun. With this type of loan, you’ll pay high points and fees for refinancing.
Home improvement scams are more common than you think. The contractor who is installing your new roof or remodeling your kitchen gives you a reasonable quote. They suggest a lender they know. Sometimes, they even try to get the homeowner to sign a blank contact form promising to fill in the amount when they’re not a busy. Typically, they’re high interest loans and once the contractor has been paid, they show little interest in how satisfied the homeowner is in the job. The homeowner
is left with unfinished or shoddy work and a large loan to pay off.
Above all else, please remember that not all scammers will look the part. They may be friendly when you first meet. Pressure is a red flag to look out for. Feel free to contact me if you are interested in buying or selling a home in the Riverview area, and please read Riverview Home Equity Scams – Part 2 for more information about home equity scams.