Common Questions about Home Loans, Mortgages and Predatory Lending
Authored By: Atlanta Legal Aid Society Inc
COMMON QUESTIONS ABOUT HOME LOANS, MORTGAGES AND PREDATORY LENDING
Q: What is equity?
A: Equity is the fair market value of your house minus any mortgages or liens. Your equity increases as you pay down the principal balance on your mortgage, as you make improvements to your home, and as property values rise in your neighborhood. The longer you have lived in your house, the more equity you probably have, assuming that you have not taken additional mortgage loans secured by your home.
Q: How do I determine the equity in my home?
A: Take the fair market value of the home and subtract the amount owed on any mortgages or liens on the home.
For example, suppose you bought a home for $60,000 in 1980 and you still owe about $29,500 on the mortgage. Over the years, you have added a new roof, a screened porch, and a central air conditioning system. An appraiser has recently valued your house at $150,000. How much equity do you have?
Fair market value $150,000
- Mortgage balance $29,500
Q: How can I protect the valuable equity in my home?
A: If you are a homeowner thinking about getting a mortgage loan, stop and ask yourself several important questions. First, ask yourself why you need money. Then ask yourself whether you absolutely need to get a loan. Consider what alternatives you may have.
If you need money for a vacation or to buy a car or to pay for home improvements, would it be better to save for the purchase instead? If you have medical bills, are they covered by health insurance, Medicare, or Medicaid? If you need home repairs or improvements and have limited income, are you eligible for home improvement grants or low cost loans from city or county or nonprofit agencies? If you are having financial problems and creditors are harassing you to pay your bills, rather than getting into more debt by borrowing more money to pay off those creditors, contact the Consumer Credit Counseling Service for help in setting up a payment plan.
If you do need to borrow money, decide whether you should borrow on your house. Consider loans that do not use your house as collateral. If you borrow money on your house and later experience financial problems, you could face the loss of your home.
If you are buying a home or decide you need to borrow money on your home, look for alternatives to predatory mortgage loans that contain abusive terms. Go to your bank, credit union, or other low cost mortgage lender. Shop around for the lowest interest rate, points, and closing costs. Do not enter into transactions with mortgage lenders or mortgage brokers who contact you directly by telephone, mail, flyers, or door-to-door solicitation. If you cannot get a low cost loan, get advice about other options from your local nonprofit housing counseling agency. Seniors should ask specifically about reverse mortgages.
Get an attorney, nonprofit housing counselor, or someone else whom you trust to review all loan documents and contracts before you sign anything. Make sure that the terms that were promised are actually in the written loan agreement. Make sure the agreement does not include terms or fees you do not understand. If you do not like or understand the terms of the mortgage loan, you do not have to sign the loan papers. You can walk away from the loan closing.
Finally, learn about common equity theft and title conversion scams and avoid them.
Q: What are some common equity theft and title conversion scams that I should avoid?
A: Home improvement fraud is perhaps the most common scam. Be extremely careful if you are solicited for a new roof or other home repairs by phone or by a door-to-door salesman. Many of these contractors are crooks who will grossly overcharge you for their services and steer you to a high-cost mortgage lender to finance the repairs. The contractor pockets the loan proceeds and performs shoddy, incomplete work or no work at all, and you're left paying off the mortgage loan for years to come.
Debt consolidation is another popular scam to steal your equity. Either a mortgage broker or a mortgage lender will contact you and offer to pay off your debts with a single mortgage loan. Watch out, though, because this single loan is almost always more expensive over the long run than all your previous debts combined. Often the mortgage broker or lender pressures you to borrow more money than you really need to pay off existing debts because the more you borrow, the more they profit. You'll most likely wind up further in debt than you were to begin with, and if you default on the mortgage loan you could even lose your home.
Loan flipping is an especially devious scam that usually follows on the heels of one of the others. A short time after you take out a mortgage loan, your lender might contact you and offer to refinance your loan, promising to make the terms more affordable. However, the lender usually flips you into a new loan just as bad or even worse than the one before. Each time you get flipped, the lender charges a new set of fees, increases your total debt and extends your period of indebtedness. You either lose your home to foreclosure or end up with payments so high you spend every cent of your income in a desperate struggle to hold onto your home.
Foreclosure assistance fraud is the most common title conversion scam. Suppose you are in default in your mortgage loan and facing foreclosure. A crook approaches you and offers to lend you enough money to catch up the back payments and save your home. You sign the papers, believing that you are getting a loan. But the papers actually say that you are selling your house to the crook for the price of the loan! The crook gets the title to your house and you get evicted.
Q: I am interested in purchasing a home. What factors should I consider?
A: It takes more than a down payment and a job to buy a house the right way. Without good income, excellent credit, and a large down payment you cannot easily qualify for a mortgage loan from a bank or other conventional lender - which means you should probably wait before buying a house. While there are some legitimate options for non-qualifying homebuyers, there are also a lot of scam artists hunting for big down payments who will attempt to lure you into a home purchase trap. It is preferable to save your money, establish your credit and qualify for a legitimate mortgage loan rather than dive in before you're ready.
When you are ready, shop around for mortgage loans, looking for a combination of the lowest interest rates and "discount" and "origination" points. The Sunday Homefinder section of the Atlanta Journal Constitution contains a chart showing interest rates offered by lenders along with any discount and origination points, so that you can compare mortgage loan products offered by various banks and other lenders.
Q: I am interested in purchasing a home. What types of home purchase traps or scams should I avoid before even signing a purchase and sale contract?
A: Some dishonest investors pretend to sell houses rather than renting or legitimately selling them. By overpricing the house and setting the monthly payments just beyond the buyer's ability to pay, the seller ensures that the buyer will default, lose the house and forfeit the down payment.
These sellers typically use one of three methods to accomplish their goal: lease with an option to purchase, contract for deed or wraparound mortgage. While these were legitimate sales methods in the past, they have become the tools scam artists use to separate unwary homebuyers from their money.
The lease with option to purchase is the most common home purchase scam. Suppose you want to buy a house but cannot qualify for a mortgage loan. The seller makes you a deal: pay the down payment up front, rent the house for a specified time (usually a year) and in the meantime find financing to purchase the house. Usually the rent is overpriced but you're willing to pay because you think you'll own the house in a year. When the time comes to exercise your option to purchase the house and you still can't qualify for a mortgage loan, the seller evicts you, keeps the house, keeps your down payment and goes looking for another over-eager, under-cautious homebuyer.
The contract for deed or land contract is essentially a rent-to-own agreement for a house. The seller provides financing and you think you own the house subject to the mortgage loan. But the contract says that the seller won't transfer the title until the last payment is made - 20 years later! If you miss even a single payment, the transaction becomes a lease agreement. The seller then evicts you for non-payment of rent and keeps the house, the down payment and all the equity you worked to accumulate.
The seller-financed wraparound mortgage is possibly the most complex home purchase scam. Again, suppose you cannot qualify for conventional mortgage loan. The sellers offers to finance a new mortgage which "wraps" around the previous mortgage. You make monthly payments to the seller, who in turn makes payments on the original mortgage and keeps the rest. (You run the risk of foreclosure if the seller does not make the payments on the original mortgage.) The seller overprices the house and sets the monthly payments just below your income, guaranteeing that you will miss a payment. Then the seller forecloses, buys the house at the foreclosure sale, evicts you, keeps the down payment and goes in search of another victim to churn through the house.
Q: I am interested in buying a new home. If I am buying a new home, what other scams should I be aware of?
A: All homebuyers buying a new home should beware of home builder fraud. Some housing developers increase profits by cutting corners when building houses or entire subdivisions. Then they sell the defective properties to unsuspecting homebuyers. Once the house is bought, it is often very difficult to make the developer or the warranty insurance company perform necessary repairs. The homebuyer gets stuck with the bill and a house worth much less than the sale price. You should always hire an independent inspector to make sure the house is in good condition and to determine if necessary repairs should be made, whether the house is new or previously owned.
Q: What if I cannot qualify for a conventional mortgage loan?
A: Your first step should be to apply for a purchase mortgage loan with a conventional lender before you begin house hunting. If you do not qualify, your housing counselor can advise you on legitimate alternatives to conventional mortgage loans. One of these alternatives, the Neighborhood Assistance Corporation of America (NACA), is a nonprofit organization that assists qualified low and moderate income homebuyers in obtaining low interest purchase mortgage loans. You may wish to contact NACA at (404) 377-4545. If you still don't qualify for a legitimate mortgage, find out what the lender's underwriting standards are and what steps you should take to meet them. You'll be better off in the long run if you work to qualify with a legitimate lender than if you take a risk on a "good deal" and end up caught in a home purchase trap.
Q: What types of experts should I contact for assistance in purchasing a home?
Visit your local nonprofit housing counseling center to set up an appointment with a counselor to evaluate your options and enroll in a free homebuyer's workshop.
Have an expert (a lawyer or a housing counselor) examine the purchase agreement and all other documents before you sign anything.
Hire an independent inspector to make sure the house is in good condition whether the house is new or previously owned.
Contact information for housing counselors:
DeKalb Housing Counseling Center (404) 508-0922
Cooperative Resource Center (404)521-0406
Gwinnett Housing Resource Partnership (678) 808-4477
Cobb Housing, Inc. (770) 429-4400
Contact information for the Neighborhood Assistance Corporation of America (NACA): (404)377-4545
NACA is a nonprofit organization that assists qualified low and moderate income homebuyers in obtaining low interest purchase mortgage loans or refinancing certain high cost, predatory loans.
Q: I believe that I, or someone I know, has already become the victim of a housing scam. Whom should I contact?
A: Call a private lawyer, the Atlanta Legal Aid Society, or the Georgia Legal Services Program immediately.
Atlanta Legal Aid Society:
DeKalb (404) 377-0701
Fulton (404) 524-5811
Southside (404) 669-0233
Gwinnett (678) 376-4545
Atlanta Bar Referral Service: (404) 521-0777
Decatur/DeKalb Lawyer Referral Service: (404) 370-0843
For residents outside of the 5-county Metropolitan Atlanta Area, please dial Georgia Legal Services Program: 1-800-498-9469
For Seniors, age 60 or older:
Senior Hotline (404) 657-9915
Q: My home needs critical repairs. How can I avoid getting ripped off by a home repair contractor?
A: Follow these simple guidelines:
Be sure your contractor is reputable - know whom you are hiring. Do not hire people who ring your doorbell and tell you your roof needs repair or your gutters need fixing. Get the names of at least three references and call them. Find out how long the job took and the quality of the work.
Don't use contractors who offer to do the job using material left over from another job.
Don't use a contractor who tries to pressure you into making a decision.
Find out what kind of insurance the contractor has. Hire people who have a current certificate of insurance.
Never pay a large sum up front. Instead, negotiate a time table and payment schedule where you will pay the contractor as work is completed.
Get it in writing-insist on a contract that specifies the work to be done, the time it will be completed, the materials to be used, the names of any subcontractors and the schedule of payments.
Get the subcontractors to waive their right to put a lien on your home if the contractor doesn't pay them.
Q: I would like to make a complaint about a mortgage lender, mortgage broker, or home improvement contractor. Whom should I contact?
A: Contact these agencies to make a complaint:
Georgia Department of Banking and Finance Mortgage Lender and Mortgage Broker Licensing Division (770)986-1269
Governor's Office of Consumer Affairs (404) 651-8600
Federal Trade Commission (404) 656-1399
Q: What are some common predatory and abusive subprime mortgage lending practices?
A: Go to Predatory Mortgage Lending Abuses, another document on this web site.
Q: I am planning to close on a mortgage loan. What if the loan carries an interest rate higher than what the lender originally promised or includes other terms that are abusive or predatory? What if I have already signed the loan documents?
A: If you see any predatory mortgage lending terms or practices, or if you have any doubts whatsoever, you can always choose not to sign the mortgage papers and walk away from the loan closing.
If you have already signed the papers, you may have the right to cancel the mortgage loan within three business days (including Saturdays) of the loan closing. If you cancel within three business days, you must do so in writing before midnight of the third business day. To protect yourself, you should keep a copy of your cancellation, and proof that you mailed the notice within the three-day period.
The three-day right to cancel generally applies to most mortgage loans on your residence that are used for a personal, household, or family purpose. The three-day cancellation right does not apply to home purchase mortgage loans (used when you buy the home), business, or agricultural loans.
If more than three business days have passed since the loan closing, you should seek legal advice as soon as possible to determine whether you may have any potential legal claims in connection with your mortgage loan.
Q: I heard that Georgia recently enacted a new predatory lending law. Does this mean that if my current mortgage loan has abusive terms, the lender will no longer be able to enforce the abusive terms? Also, does this mean that new loans will not contain abusive terms?
A: On April 22, 2002, Governor Barnes signed into law the Georgia Fair Lending Act(GFLA). Some view this new law as the strongest anti-predatory mortgage lending law in the country. This new law will help curb predatory mortgage lending in Georgia, but will not stop all predatory terms and practices for all mortgage loans. The new law applies only to certain mortgage loans made after October 1, 2002. Some practices and terms are prohibited or restricted for all home loans. Other practices and terms are prohibited or restricted only for certain covered loans or certain high cost loans.
On March 7, 2003, amendments to GFLA were enacted that substantially weakened the protection of the original law, rendering useless most of GFLA's critical provisions.
Other laws (federal and state) exist that provide some protections for homeowners and home buyers. The federal laws include the Truth in Lending Act, the Home Ownership and Equity Protection Act, and the Real Estate Settlement Procedures Act.
If you have a mortgage loan that contains abusive or predatory terms (whether the loan was made before or after October 1, 2002), you should seek legal advice as soon as possible to determine whether you may have any potential legal claims under existing federal or state law.