Homeowners beware. These days, home loan scam artists are lurking around every corner. They’re hungry, they’re determined and they’re coming after your equity.
Unscrupulous loan peddlers are known as predatory lenders because of their uncanny resemblance to vultures. These loans encourage people to consolidate their debts and suggest this will prevent them from ever overspending and maxing out their credit cards again.
Predatory lenders deal in asset-based lending: They make the loans based solely on the amount of equity a borrower has in a property rather than considering the borrower’s ability to repay the loan.
Victims of predatory lending frequently describe being subjected to a flood of phone calls and letters from brokers and lenders, encouraging them to take out a home equity loan.
Red flag: Lenders who engage in high-pressure tactics, telemarketing, cold calling and deceptive advertising campaigns.
Predatory lenders routinely charge borrowers fees totaling as much as 15% to 20% of the loan amount. Fees alone can have a ruinous impact on a homeowner’s equity. But add them to prepayment penalties and you’re locked into a high-rate, financially disastrous loan.
Red flag: You inquire about fees and charges, but you can’t get the facts. They insist there are no “upfront” fees.
You need money. You don’t have enough coming in each month to cover your expenses. You have equity in your home. A lender tells you that you could get a loan. This is a big shock because you know you will have difficulty keeping up with the payments. The lender encourages you to “pad” your income on your loan application to help get the loan approved.
Equity stripping is particularly dangerous for people who find themselves in financial trouble. Scammers target people who are facing foreclosure or other financial hardships and make false promises of relief. Beware of anyone who pops up at what seems like the perfect time promising to let you cash in the equity you’ve built up without any consequences. Falling for this scam could end up with you losing your home and all of the equity you’ve accumulated.
Red flag: Any suggestion that you can qualify for a loan when you know the truth is you cannot reasonably make the payments.
You’ve fallen behind in your mortgage payments. Another lender offers to save the day by refinancing your mortgage and lowering your monthly payments. But beware. The payments may be lower because the lender is offering a loan on which you repay only the interest each month.
Red flag: Unrealistically low payments.
Senior homeowners who are asset-rich but cash-poor are prime targets for this scam. A mortgage company contacts you offering to refinance your loan and throw in some extra cash along with it. The problem is, each time you refinance, the fees and interest rates are going up.
Red flag: Lenders that contact you and any suggestion that a loan is the way to get your equity to start “working” for you.
Not all lenders are predatory. The best way to protect yourself against those who are is to be keenly aware of their tactics and always on the lookout for the red flags. If you need an explanation, talk to someone you can trust who has nothing to gain or to lose by the decision you make. Be careful how often you refinance your mortgage. Talk to a HUD-approved housing counselor (www.hud.gov/counseling) if you have questions or concerns about any mortgage loan transaction. Then consider all the costs of financing and repayment before you agree to a loan.