Second mortgage home loan scams are especially prevalent during housing booms when equity is growing at a record pace and homeowners regularly refinance or take out home equity loans or home equity lines of credit. Although most reputable lenders return to reasonable loans when a housing boom ends, predatory lenders are still out there. If you’re looking for a second mortgage, watch out for these scams.
Popular Second Mortgage Home Loan Scams
Scammers create new tricks every day, but these are the most common tactics you’ll encounter and tips to avoid them.
Once your second mortgage loan is complete, a disreputable lender will encourage you to repeatedly refinance your loan each time a lower rate is available. Each refinancing comes with hefty fees that erase your potential savings. Tip: Always determine the potential costs and savings before refinancing. Don’t let a lender pressure you into refinancing in order to get a great deal that will vanish tomorrow.
Abusive Loan Servicing
Some predatory lenders don’t strike until the loan is closed. Once the loan is complete, you receive letters from the lender claiming you owe additional taxes or fees that you paid directly. They may also charge late fees even though your payments are on time. Tip: If you’re being asked to pay something you don’t owe, send the lender a letter with proof of payment.
Your lender encourages you to buy additional voluntary credit insurance and bundle it into your second mortgage payments. Tip: Don’t accept this insurance with the loan. If you’re interested in it, buy it separately.
Altering Loan Documents After the Fact
The FTC has charged several predatory lenders with fraudulently changing loan documents after the fact. Tip: Never sign documents you haven’t read or sign them under pressure. If there is a blank space, draw a line through it and initial it. Always get a copy of all loan documents you signed before leaving the office.
Deceptive Home Improvement Loan
A contractor may knock on your door and offer to do home repairs. To help you pay for it, he’ll even arrange the financing. The financing is usually a high-interest home equity loan with poor terms, but the contractor threatens to stop the work if you don’t sign. Once you sign, the contractor fails to complete the project or the work is shoddy. Tip: Before deciding to do home repairs, interview several contractors, review estimates and references, and arrange the financing yourself.
Demanding Your Deed
Default filings are public records. If you receive calls from lenders following a notice of default, be very cautious. Scammers will offer to save you from foreclosure with a new loan, but demand you sign the deed over to them before the financing is arranged. The “lender” can evict you, sell your house, or borrow against it, leaving you without a home. Tip: If you receive a notice of default, contact your lender about refinancing or contact alternative lenders after careful research.
If you’ve experienced financial difficulties, but have built up substantial equity, the predatory lender encourages you to lie about your income on the second mortgage application in order to qualify for a larger loan than you can afford to pay. Once you default, the lender forecloses, leaving you with nothing, but they can sell your house and earn a profit. Tip: Never borrow more than you afford to repay and never lie on a loan application.
What to Do if You’ve Been A Victim of a Scam If you’ve fallen victim to one of these home loan scams, you can get help before you lose your home.
If your loan has additional insurance included in it, try to cancel it. If interest rates are lower, it may be worthwhile to refinance to a new second mortgage without the insurance.
If your contractor fails to complete the work or completes it poorly, report him to your state’s contractor licensing agency. You may also be able to sue him. Contact a reputable lender to refinance the high-interest loan.
For all other scams, first contact a lawyer to determine your rights and recourse. Second, file a complaint with Consumer Protection Bureau of the FTC. Although the FTC doesn’t resolve individual complaints, they can take action if a record of abuse can be proven.
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