You could lose your home, the equity you have built in your home and your savings if you are pressured to take out a loan by unscrupulous lenders or mortgage brokers who offer you a high-cost loan you cannot afford. Knowing you have equity in your home, mortgage lenders and mortgage brokers may mislead you into signing a loan that is difficult for you to pay. Certain lenders and brokers target homeowners who are elderly or who are low-income or who have credit problems and then try to take advantage of them by using deceptive practices. Furthermore, with the collapse in home values, fraudsters are taking advantage of homeowners in distress through mortgage rescue fraud. The Federal Trade Commission cautions all homeowners to be on the lookout for the following.
Consumer Pamphlet: Mortgage Fraud
Home Equity Scams
Following are examples of common home equity scams:
- Equity stripping: The lender gives you a loan based on the equity in your home, not on your ability to repay.
- Loan flipping: The lender encourages you to repeatedly refinance the loan either to catch up on missed payments or pay off other bills. Every time you refinance the loan, new fees and other charges will be added to the amount you owe.
- Credit insurance packing: The lender adds credit life or disability insurance premiums to your loan. This insurance is expensive and may not be necessary. It is also sold without regard to the borrower’s ability to benefit from the coverage. No lender may require credit insurance as a condition of making a home mortgage loan.
- Bait and switch: The lender offers one set of loan terms when you apply, and then when you show up at the loan closing, the interest rate is higher or the terms have changed, i.e. a fixed rate loan is now an adjustable rate loan. You feel pressure to sign the new loan because you do not know of the changes until the last minute and you feel you have no choice but to go through with the loan.
- Deceptive loan servicing: Loan servicers are the companies that collect your payments. New regulations from the Consumer Financial Protection Bureau require that your servicer provide you extensive information with your written mortgage statement each billing cycle. The regulations also require that you receive a 45-day notice that your insurance has lapsed before adding or force-placing insurance. Your servicer also must let you know of help available if you are having trouble paying your mortgage. If you are not receiving these protections from your servicer, you may be dealing with deceptive loan servicing.
Some of these practices violate federal consumer protection laws requiring certain disclosures about loan terms, prohibiting discrimination based on age, gender, marital status, race or national origin, and governing debt collection activities. For example, you may have the right to “rescind” your loan under certain circumstances if proper disclosures are not provided before you sign the loan. You are entitled to an accounting to make sure your loan is being properly collected, and you can check to see if the servicer has properly kept track of how much you have paid and how much more you owe.
You also may have additional rights under state law that would allow you to bring a lawsuit against your lender or the company collecting your loan if there were problems with the loan process or in the collection of the loan.
Mortgage Rescue Fraud
- Avoid any company that asks you to pay an upfront fee for assistance in helping you save your mortgage.
- You should never stop paying your mortgage to qualify for a loan modification.
- Be wary of a “forensic audit” of your mortgage loan, and do not pay an upfront fee for an audit.
- Be careful of a lease/buyback option or any other attempts to get you to deed your home to someone else.
The Federal Trade Commission regularly posts scam alerts with practical tips to avoid becoming a victim of a scam.
Choosing a loan
- High interest rates, other credit and closing costs, and adjustable interest rates could get you in over your head.
- If you want the added security of credit life or disability insurance, you should shop around and not just purchase it through your lender.
- Do not sign a loan agreement if there are terms that are not what you were told when you applied.
- Ask for an explanation of any dollar amount, term, or condition that you do not understand or that you think is too high.
If you’re thinking about using your home as collateral for a loan, be careful. Unless you can make the loan payments out of your current income, you could lose your home as well as the equity you have already built up in your home. Some additional tips to remember:
- The lure of extra money or the change to reduce monthly loan payments can be very costly in the long run. Each time you sign a new loan, new fees and costs are added to the amount you owe.
- Credit insurance from a lender may not be a good deal.
- The law is very clear that you should receive a good faith estimate explaining your interest rate, loan costs and terms information in writing when you apply for a loan and before you sign any loan agreement.
Right to rescind
If you are signing a home mortgage that is not the loan you used to buy the home, you have a right to rescind the loan if certain disclosures are not provided before you sign the loan. If you have a right to rescind, you have until midnight of the third business day after you signed the loan document to cancel the loan. Day one begins after all three of the following occur:
- You sign the loan.
- You receive a Good Faith Estimate and a Truth in Lending disclosure form containing certain key information about the credit contract, including the annual percentage rate, finance charge, amount financed and payment schedule.
- Each borrower receives two copies of a Truth in Lending notice explaining your right to rescind.
For rescission purposes, business days include Saturdays but not Sundays or legal public holidays. For example, if the events listed above take place on a Friday, you have until midnight on the next Tuesday to rescind.
During these three days, activity related to the mortgage cannot take place. The creditor may not deliver the money for the loan. If you’re dealing with a home improvement loan, the contractor may not deliver any materials or start work.
If you decide to rescind, you must notify the creditor in writing. Your written notice must be mailed, filed for electronic transmission or delivered if by other written means, before midnight of the third business day.
Exceptions are loans that consumers use to purchase or build their primary residence, refinancing with the same creditor when no new money is provided, or loans with a state agency as the creditor.
Home Equity Dos and Don’ts
- Ask specifically if credit insurance is required as a condition of the loan; it is illegal to require credit insurance as a condition of the loan.
- Keep careful records of what you’ve paid and when your payments are received.
- Check contractors’ licenses and references for any home improvement projects, small or large. Get more than one estimate.
- Read all documents carefully.
- Credit insurance no longer can be financed in your mortgage loan.
- If you want to purchase credit life or disability insurance, shop around for the best price.
- Keep records, including billing statements and canceled checks. Challenge any charge you think is inaccurate.
- Read all letters and other documents carefully. If you need an explanation of any terms or conditions, talk to someone you can trust, such as a knowledgeable family member or attorney.
- Consider all the costs of financing before you fill out an application or a loan and before you allow a lender to pull your credit.
- Make sure you have the income to support your monthly payments, plus all of your other monthly bills. If your loan is an adjustable rate loan, you must plan for your payment to increase.
- Don’t take out a loan if you can’t afford it.
- Don’t sign any documents with blank spaces or without reading the document you are signing.
- Don’t let anyone pressure you into agreeing to take out a loan or to any of the loan terms.
- Don’t sign up for extras you don’t need, like credit life or disability insurance.
- Don’t let your judgment be clouded by an offer of cash.
- Don’t let anyone pressure you into signing a deed to your property to anyone as a condition of a loan.
- Don’t let anyone pressure you into paying off unsecured debt as a condition of a loan. This just increases the amount of the loan secured by your home, while unsecured debt does not put your home at risk of loss for non-payment of the debt.
You want to make sure that the loan is worth the short-term and long-term costs. You can find loan calculators on the internet to help you determine how long it will take you to make up for the costs of the new loan with your new lower payments and whether, in fact, your payments will be lower with the new loan.
Before signing a loan application, consult an attorney, a knowledgeable family member or someone else you trust to help you determine if the interest rate and costs are fair and if you can afford the loan.
In a reverse mortgage, the consumer receives money from the lender and generally does not have to pay it back for as long as he or she lives in the home. Instead, the loan must be repaid upon death, sale or when the consumer no longer lives there as a principal residence.
Whether seeking money to finance a home improvement project, pay off a current mortgage, supplement retirement income or pay for health care expenses, many older Americans are turning to “reverse” mortgages. They allow older homeowners to convert part of the equity in their homes into cash without having to sell their homes or take on additional monthly bills.
In a “regular” mortgage, you make monthly payments to the lender. Reverse mortgages can help homeowners who are house-rich but cash-poor stay in their homes and still meet their financial obligations. Unfortunately, the initial and monthly charges assessed with a reverse mortgage can be high.
To qualify for most reverse mortgages, you must be at least 62 years of age and live in your home. The proceeds of a reverse mortgage (without other features, like an annuity) are generally tax-free, and many reverse mortgages have no income restrictions. Reverse mortgages are complex. One in 10 reverse mortgages end in default.
Is a reverse mortgage right for you?
The amount you are charged for origination fees and other closing costs, along with the monthly loan insurance and servicing fees, will significantly decrease the amount you can borrow.
The amount you owe grows with each month that passes and with each set of monthly fees and interest that is added to the loan balance.
The mortgage uses up all or most of the equity in your home; that leaves fewer assets for you and your heirs.
You are still responsible for property taxes, insurance, utilities, fuel, maintenance, homeowners’ insurance and other expenses.
Interest is not deductible on income tax returns until the loan is paid off.
Interest is charged on the outstanding balance and added each month to the amount you owe. This is another reason your total debt increases over time as loan funds are advanced to you. Monthly service fees and insurance are also added each month.
A “nonrecourse” clause, found in most reverse mortgages, prevents either you or your estate from owing more than the value of your home when the loan is repaid.
Reverse mortgage tips
- Be cautious! Beware of anyone who tries to sell you something, like an annuity or home improvements, or tries to get you to pay off unsecured debt and suggests that a reverse mortgage would be an easy way to pay for it.
- Make sure you take time to understand the loan terms and costs. If you don’t fully understand what they’re selling, or you’re not sure you need what they’re selling, be even more skeptical.
- You will be required to have homeowner counseling before you sign a loan. Please make sure the counselor reviews your Good Faith Estimate and other loan documents.
- You should shop around for the best rate before you sign a reverse mortgage.
- You have a three-day cooling-off period if you sign a reverse mortgage. Remember that you must cancel in writing. The lender must return any money you have paid so far for the financing.
- Be aware that if you have to move to an assisted living facility on a permanent basis, you may be required to pay the reverse mortgage.
The Department of Housing and Urban Development (www.HUD.gov) has a lot of information about reverse mortgages, including the top 10 issues to be considered. Additional information, including a downloadable Consumer Guide, is available from the Consumer Financial Protection Bureau.
High-Cost Mortgage Loans: Which Are Covered?
Because of the risky nature of high-cost mortgage loans, there are federal laws that provide protections for consumers specific to these loans. These laws were updated in 2010 by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
A closed-end home equity loan or an open-end credit plan as well as purchase money mortgages and refinances are covered by the law if they meet the following tests:
- For a first mortgage secured by your home, the annual percentage rate (APR) exceeds by more than 6.5 percentage points the average prime offer rate for a similar mortgage.
- For any second mortgage, the APR exceeds by more than 8.5 percentage points the average prime offer rate for a similar mortgage.
- For a loan of less than $50,000 on a mobile or manufactured home not secured by real estate, the APR exceeds by more than 8.5 percentage points the average prime offer rate for a similar mortgage.
- For a loan of less than $20,000 with points and fees that total 8 percent of your loan or $1,000, whichever is less.
- For a loan of $20,000 or more with points and fees that total in excess of 5 percent of the loan.
Home Ownership and Equity Protection Act (HOEPA)
What HOEPA prohibits
- Balloon payments. There are exceptions, including for bridge loans of 12 months or less to finance a new home purchase when selling an existing home, or to accommodate a consumer’s seasonal income.
- Negative amortization: Involves smaller monthly payments that do not fully pay off the loan principal and interest required each month, which causes the amount you owe to increase.
- Default interest rates higher than pre-default interest rates.
- Prepayment penalties.
- Due-on-demand clause.
- Stricter requirements for appraisals.
- Additional appraisal is required for a home that is a “flip.”
For more information on mortgage fraud and your rights:
- Attorney General Fraud Hotline, 866-966-7226
- Consumer Financial Protection Bureau – “Have a mortgage? What you can expect under federal rules”
- Consumer Financial Protection Bureau – “Shopping for a mortgage? What you can expect under federal rules”
- Federal Trade Commission: Mortgage Relief Scams
- National Reverse Mortgage Lenders Association (NRMLA)
This pamphlet is produced as a public service for consumers by The Florida Bar.
[Updated November 2018]