How Predatory Lenders Perform an Equity Stripping Scam
In today's troubled mortgage market, 'predatory lenders' is a phrase finding its way into the household vernacular. It's disturbing that there are enough predatory lenders that the phrase has become commonplace, but even though you know the phrase - do you know what a predatory lender actually does? Could you spot a predatory lender? If you're shopping for a loan, educate yourself about predatory lending practices and how to avoid them.
What is a predatory lender?
A predatory lender is an individual or company that takes advantage of a specific lending practice or demographic to steal money. In many cases, predatory lenders commit actual crimes, violating state or federal law and then vanishing into the night before law enforcement agencies can catch them. In some cases, predatory lenders actually use loopholes in existing laws to trick consumers into getting further in debt, signing over the deeds to their homes or borrowing money in the consumer's name. If you fall victim to a predatory lender, you could loose your car, your house, your savings and all of your assets. Predatory lenders can cause your credit score to drop drastically. The best way to protect yourself from predatory lending practices is to learn about the most common scams and avoid them, when possible.
What is an equity stripping scam?
One of the most common predatory lending practices in today's foreclosure-ridden housing market, equity stripping scams are some of the most serious crimes committed against consumers. Most frequently, equity loan scams target homeowners on the verge of foreclosure. Equity stripping lenders often contact people newly threatened with foreclosure and offer to 'help' them retain their homes. In a private equity scam, the predatory lender offers to assume your mortgage payments if you sign the property over to them. Once the lender has the deed, the company then commits equity fraud - borrowing exorbitant amounts of money against your property.
If you have a $300,000 loan and you still owe $225,000 at the time you sign it over to an equity stripping lender, they may borrow as much as $375,000 against your property - taking your $75,000 in equity and even earning an additional $75,000 with an expensive 125% mortgage. The predatory lender, having successfully perpetrated a home equity loan scam with your property, vanishes with $150,000. They stop making mortgage payments, and you'll get a letter in the mail saying that your home is facing foreclosure. Instead of having a manageable mortgage payment with some equity in your home, you then have a completely unrealistic mortgage payment and owe more than your home is worth. Many people in this situation face foreclosure. Your credit score drops, sometimes more than two hundred points because of the pending foreclosure.
How to protect yourself from an equity stripping scam.
Fortunately, there are ways to protect yourself from an equity stripping scam. First, beware a lender who comes to your door or contacts you with an offer to 'bail you out' of your current financial woes. If it sounds too good to be true, it probably is. As a general rule of thumb, unsolicited financial help usually comes at a price. Rather than trust a potentially predatory lender, contact your current lender and attempt to re-negotiate your monthly payments. It's in your lender's best interest to keep you paying the mortgage, so lenders are often willing to work with homeowners to keep them in the house. If you absolutely cannot afford the payments and must leave the house, consider a deed in lieu of foreclosure or a short sale. Both of these options affect your credit less severely than a foreclosure, and you may be able to make up the entire shortfall if you have some equity in your home.
If you do choose to refinance or work with a private investor to retain your home, go very carefully. Never sign a document with blank lines. Never sign a document you don't understand completely. Don't let a lender pressure you into signing something quickly. In this situation, it's a good idea to hire a lawyer to look over any potential paperwork. A consultation with a good lawyer may cost as much as $250, but that could save you thousands of dollars and help prevent a foreclosure in the long run. It's well worth the cost.
If you believe you may have been the victim of an equity stripping scam:
Contact an attorney or your local housing agency. Resources exist to help victims of equity stripping scams. You may face a long, difficult battle - but you don't have to lose your home. Be proactive, and take steps to protect your credit from potential fallout. If your credit score is dropping because of a predatory lending practice, check out the Credit Secrets Bible to learn how you can improve your score.
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