You should always treat using your home equity as loan collateral seriously. There are several common home equity loan scam types to watch out for. Take your time and be careful when shopping for and taking out any type of home loan or mortgage product. You'll get the best loan deal you can find and avoid scams risking your hard-earned home equity.
The Federal Trade Commission and the US Department of Housing and Urban Development offer resources for homeowners to learn about loan products and practices, and avoid scammers. If you're concerned about a lender's mortgage practices, you can also seek help from your state's Attorney General's office.
Your Home Loan Needs and Scammer Opportunities
When homeowners seek a home equity loan, they often aren't aware they're also being scammed when they sign loan papers, or even deeds to their homes. Many scam victims are older homeowners, minorities, and those with poor access to credit.
Even with volatile real estate markets, many homeowners pay their first mortgages, or have paid off their loans, and have a substantial amount of home equity. The home equity loan or line of credit (HELOC) are ways for you to tap the equity in your home, which is likely your single largest and most valuable asset.
Here are the common types of home equity loan scams:
In this scam, a lender will push you to bump up your income on your loan application, and you qualify for a loan you really can't afford. Your loan payment is so high, you're primed to default on the loan - there's no way to keep up. The lender is waiting for this to happen, and goes ahead with foreclosure. You end up losing your home, and your built-up equity. Never give false information on a loan application, even if prompted by the lender.
Home Improvement Loans
If you've owned your home for some time, or it's an older home needing repairs, scammers are ready and waiting for you. Major repairs and improvements can cost thousands you don't have in cash. Watch out for offers and contact from contractors, often going door-to-door, who offer these improvements for reasonable prices, with financing through an affiliated lender.
If you agree, the contractor starts work, and you're presented with loan documents. The loan is a home equity loan, and the terms include a high interest rate and fees. Even worse, loan documents may include blanks, and you're pressured to sign so work continues. In this scam, contractors' work is often poorly done or incomplete, but there's a loan recorded against your home. You face foreclosure if you don't make the payments.
"Flipping" - Repeat Refinancings
If you have a large amount of home equity, scammers may see you as a target for loan flipping. In this practice, you're offered refinancing several times; the loans are bigger, or seem to promise better terms than your current loan.
What happens is you're borrowing more against your home, draining equity, and each refinance loan carries high points and fees. You may have some extra cash, but at the cost of longer loan terms, and multiple loans, with costs rolled into each one. You may have prepayment penalties for quick turnarounds on refinancings. When you look back, your debt load is heavier and you may end up decades out from your last mortgage payment.
Lower Mortgage Payments Hiding behind Loan Terms
Refinancing may appeal to you because you need a lower payment, and you may see loan default and foreclosure on your horizon. When you refinance, you may not read and understand key mortgage terms; you're now a future foreclosure risk. Scammers lure you in with a low payment, made possible by an interest-only loan, or a loan with a balloon payment. You may like the lower payment, but when the balloon payment is due, you can't pay it. You may not be able to refinance and foreclosure is a real risk.
Signing a Deed over to the Lender
If you can't pay your mortgage, lenders may solicit you with a loan solution. You're asked to sign a deed to your home, transferring ownership to the lender. It's promised as a temporary measure, while other financing is lined up. However, the supposed lender has other plans for your home and it's equity.
The lender, as the new "owner" of your home, may borrow against it, or even sell it. Since you're no longer the owner of record, you don't have any rights in sales or loan proceeds. If you're still in the home, you're treated as a tenant. Eviction is possible if you don't pay the rent demanded by the "lender."
Credit Insurance and Loan Servicing
Watch out for charges for products or services you didn't ask for or agree to buy. The main product is credit insurance. The insurance adds to your monthly payment. You're afraid to object at closing, and if you do, the lender may say changes will delay closing or put your loan in jeopardy. Don't go ahead with closing if you're presented with charges or products you didn't ask to buy or don't understand.
You may run into problems with loan servicing. You might receive notice your payment is higher or the lender informs you it bought property insurance on your behalf. Difficulty obtaining payoff statements is another problem, and it's hard to tell what you've been charged and what you truly owe.
Guard Your Home and Equity
Finally, know your rights as a consumer, borrower and homeowner. Federal laws protect consumers and govern mortgage loans, including home equity loans. The lender must give you disclosures for your loan product at several points in the loan process. Federal law gives you three days to cancel a home equity loan after you sign the loan papers. You can't be charged a penalty, and funds already paid must be returned to you.
Questions for Your Attorney
- Is refinancing the only way to get out of a bad home equity loan?
- Can you help me get an accurate payoff statement from my lender? What can I do if I lose my new loan due to lack of the payoff statement?
- My lender added property insurance to my account without my consent, even though I sent proof of my policy and insurance agent info. Can I get this removed from my loan account and monthly mortgage bill?