Mortgage Scams; Did You Fall For One?
A home is the most expensive investment most people will ever
own. For cash-strapped homeowners a home equity loan is a
temptingly easy way to get cash. However, some home equity
lenders are dishonest, and gullible consumers are at risk of
losing their biggest asset. Borrowers should be wary of
unscrupulous lenders and their scams to avoid losing their homes.
Financially unsophisticated homeowners, such as the elderly,
members of minority groups and people with poor credit ratings,
are often targeted by unscrupulous lenders using unethical
lending practices.
One tactic used is called "equity stripping". In this instance,
cash-strapped prospective borrowers who the lender knows cannot
met the monthly payments are encouraged to exaggerate their
income on the application form to help get the loan approved. As
soon as the borrower fails to meet the monthly payment, the
lender forecloses, stripping the borrower of all the equity in
the home. Low-income homeowners should beware of lenders who
encourage them to accept loans which they cannot afford to
repay.
Another tactic is the balloon payment. A borrower who is falling
behind in mortgage payments is offered mortgage refinancing at a
lower monthly payment. However, the payments are lower because
they cover only the loan interest. At the end of the loan term,
the principal -that is, the entire amount of the loan -is due in
one lump sum called a balloon payment. If the borrowers cannot
make the balloon payment or refinance, the home is foreclosed.
Loan flipping is another deceptive practice. The company holding
a homeowner's mortgage offers to refinance in order to give the
homeowner extra cash, but charges high points and fees for doing
so. The extra cash received may be less than the additional
costs and fees charged for the refinancing; moreover, interest
must be paid on the extra charges.
Home improvement scams are very common. A contractor offers to
install a new roof or remodel a kitchen at a price that sounds
reasonable, and offers financing through a lender he knows.
Sometimes the contractor even attempts to get the homeowner to
sign blank contract forms with the promise they will be filled
in later when the contractor is "less busy". Often, the rates
offered are not competitive, and as soon as the contractor has
been paid by the lender, he has no interest in completing the
job to the homeowner's satisfaction. The homeowner is left with
unfinished or shoddy work and a large loan to pay off.
Credit Insurance Packing is the charging of extra fees at the
closing of a mortgage. A homeowner and a lender come to an
agreement on a mortgage, but at closing, the lender tacks on
charges for credit insurance or other "benefits" that the
borrower did not ask for and did not discuss. The lender hopes
the borrower won't notice this, and just sign the loan papers
with the extra charges included. If the borrower questions the
last minute charges, the lender may state that the charges are
standard policy for all loans, and if objections continue, the
lender will claim that it will take several days to draw up a
new contract, or that the bank manager may reconsider the loan
altogether. Due to these last-minute pressure tactics, the loan
may wind up costing considerably more than initially stated.
Borrowers who agree to buy the insurance are paying extra for a
product they may not want or need.
Mortgage Servicing Abuses occur after the mortgage has been
closed. Borrowers get bills from mortgage companies for payments
such as escrow for taxes and insurance even though the homeowner
agreed beforehand with the lender to pay those items themselves.
Bills arrive for late fees, even though payments were made on
time. Or a message may arrive saying that the homeowner failed
to maintain required property insurance and the lender is buying
more costly insurance at the homeowner's expense. Other
unexplained charges such as legal fees are added to the amount
owing, increasing the monthly payments or the amount owing at
the end of the loan term. The lender does not provide an
accurate or complete account of these charges. When homeowners
get tired of these tactics and ask for a payoff statement in
order to refinance with another lender, they receive inaccurate
or incomplete statements. The lender makes it almost impossible
to determine how much has been paid and how much is still owing
on the loan.
Homeowners should avoid signing over the deed to their
properties to lenders under any circumstances. If a borrower is
in danger of foreclosure, a second "lender" may offer to help
prevent the loss of the home, if only the homeowner will sign
over the property as a "temporary" measure. The promised
refinancing never arrives, and the lender now owns the property.
Once the lender has the deed to your property, he can treat it
as his own. He may borrow against it or even sell it to someone
else. The borrower no longer owns the home, and will receive no
money when it is sold. The lender can treat the borrower as a
tenant and the mortgage payments as rent. If the "rent" payments
are late, the borrower can be evicted.
To protect against unethical lending practices, homeowners
should never agree to loans beyond the means of their monthly
income; sign any documents before reading the fine print; or let
any lender pressure them into signing immediately. Never allow
the promise of extra cash or lower monthly payments get in the
way of good financial judgment. If a loan sounds too good to be
true, it probably is.
Always ask specifically if credit insurance is required as a
condition of the loan. If the added security of credit insurance
is desired, shop around for the best rates. Keep careful records
of all payments, including billing statements and canceled
checks. Challenge any inaccurate charges; many companies hope
that borrowers will simply not be bothered.
Hire contractors only after checking their references, and get
more than one estimate for any job. Borrowers who are
financially inexperienced should consider consulting with an
accountant or an attorney before signing a loan.