Because lending transactions often seem complicated, it’s not unusual for borrowers to rely on the expertise of professionals for guidance through the process. But what if your “professional” is actually a scam artist or predator looking to push you into a costly or risky situation? With their sweet talk and smooth assurances, these predators are often indistinguishable from legitimate lenders.
Home Title Scam
It’s hard to believe, but there are homeowners who have actually been cheated out of the titles to their homes. While these “deals” sound good because they provide brief, short-term relief in a cash crunch, the long-term effect usually tells a different story. Homeowners receive a fraction of what the home was worth, and they stand to lose all their hard-earned equity in the process.
Here are a few examples of how a title scam could occur:
- Someone offers you fast cash for the title to your home, but leaves you saddled with the mortgage obligation.
- Someone offers to give you a loan or help you finance much-needed repairs, and tells you that in order to secure financing, you must transfer your property deed or title so that someone with a better credit rating can obtain the repair loan on your behalf.Unfortunately, once you transfer the deed, the home is no longer yours.
- Someone offers to take over your mortgage and your title (allowing you to remain in your home as a renter) so that you can buy the house back when you get on your feet. Consequently, there’s no guarantee that you’ll ever own the home again.
Home Improvement Loan Scam
Every year, shady home improvement contractors scam thousands of consumers.
Home improvement scams come in various forms, including the two most common:
- The contractor asks for money up front and leaves after completing little or no repair work.
- The contractor helps you get a loan to finance repair costs that then grow beyond the original estimate and agreement. The repair costs, plus exorbitant hidden fees and high interest rates, become so expensive they’re ultimately unaffordable.
Post-Disaster Insurance Scam
Even in the wake of a disaster, homeowners must be on the alert. Insurance scams can happen in a number of ways.
Here are a few examples:
- You’re waiting for your insurance claim to be processed. Someone offers you a lump sum payment in exchange for the right to your insurance money once it arrives. These “advances” are generally not a good idea because you could end up getting much less than what the insurance company eventually pays out.
- Your contractor asks you to sign a “direction to pay form” that allows your insurance company to pay the contractor directly, even before the repair work is completed। Don’t do it, or at least wait until all work is completed, you’ve inspected it, and you are satisfied with the final product.
- Someone offers to loan you money for home repairs while you wait for your insurance money. In return, they ask for (1) a post-dated check, (2) your auto title, or (3) your tax refund. These scams are almost always high-interest loans. While they may give you some short-term relief, the long-term cost could be devastating. Before agreeing to one of these loans, make sure you know just how much it’s really going to cost you.
Equity-Stripping Foreclosure “Rescue” Scam
For most of us, taking advantage of someone in trouble would be unthinkable, but the equity stripping (or equity skimming) foreclosure “rescue” scam does just that. Scam artists seek out homeowners near foreclosure and offer them what they think is a way to stay in their homes. What the homeowner doesn’t realize is that in the process, they’re signing away the house and the equity. They get to stay in their houses, but suddenly they’re just tenants.
Predatory or Abusive Lending Practices
When unscrupulous lenders are at work, they are capable of many forms of predatory or abusive lending practices:
- Repeatedly encouraging you to refinance your loan within a short period of time, and charging high points and fees with each refinance. They may claim that you’re getting better rates each time, but be sure to consider how much you’re paying in additional fees and interest with each new loan transaction.
- “Packing” a loan with single premium credit insurance products, such as credit life insurance, and not adequately disclosing its inclusion, cost, or additional fees associated with the insurance.
- Charging excessive rates and fees to borrowers who actually qualify for lower rates and fees offered by the lendar.
Avoiding Borrowing Pitfalls (from Freddie Mac’s Don’t Borrow Trouble®)
With so much at stake, how does a homeowner avoid falling victim to a scam or dishonest lending situation?
- Say NO to “easy money.” Beware if someone claims that your "credit problems won't affect the interest rate." If a solicitation for a loan sounds too good to be true, it probably is। If a solicitation is really appealing, get it in writing!
- Shop around. Always talk to several lenders to find the best loan for which you qualify. A loan product or lending practice may not seem predatory until compared with a similar loan product offered by other lenders.
- Understand the loan terms. Compare loan terms from different lenders. Understand the best loan terms available in the marketplace and compare the APR (annual percentage rate) of loans from different lenders. The APR takes into account both the interest rate and the points and fees of the loan. A nonprofit housing counselor or a lawyer can review the information with a borrower.
- Find out about prepayment penalties. Know if the loan offered to you has a prepayment penalty. Whether a loan contains a prepayment penalty should be your choice. If it is a requirement of the loan, you may want to ask about other products that do not contain a penalty.
- Make sure documents are correct. Be cautious of someone who offers to falsify your income information to qualify for a loan. Never falsify information or sign documents that you know to be false.
- Make sure documents are complete. Do not sign documents that have incorrect dates or blank fields. Be wary of promises that a lender will “fix it later” or “fill it in later.”
- Ask about additional fees. Question any items you didn’t request. Beware if you are told that single premium credit insurance is required to get a loan, or that purchasing it will help loan approval. Review every fee and compare different lenders’ fees to ensure the most competitive loan terms.
- Understand the total package. Ask for written estimates that include all points and fees. The situation may not seem abusive until everyone gets to the closing table. If any fees or charges differ from what was previously disclosed, delay the closing until all terms of the loan are clearly understood.
- Work with legitimate credit counselors. Get all the facts before deciding to combine credit card or other debts into a home loan. Beware of scam credit counseling and credit consolidation agencies—unfortunately, not all credit counseling agencies are acting in your best interest. Talk to a community-based consumer credit counseling agency or housing counselor before signing any new loan documents.
- Protect home equity. If you are taking equity out of your property, take out the minimum amount needed. The equity in a home is a source of wealth, which builds up slowly over time.
If you’re not sure, don’t sign! Get advice first! Talk to a community-based consumer credit counseling agency or housing counselor.
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