Because of its overwhelming success, the VA Loan program became the favorite target of most scammers. And that’s not all. Authorities note that there has been a staggering increase of VA loan scam incidents every year. Most of these come from unsolicited phone calls. VA members who became prey to unscrupulous companies are also not unheard of.
It’s essential for you to know that there are some legitimate lending companies who employ aggressive marketing methods in promoting their VA loan services. Though most of these companies do not intend to deceive potential clients, a handful ends up presenting attractive offers that are too good to be true – often causing financial losses on the borrower’s end. If you’re a potential VA loan borrower looking for ways on how to avoid scams and fraudulent marketing, you’re in the right place. In this article, will be covering some of the most common scams involving VA loans, so keep reading.
Most Prevalent VA Loan Scams
The VA Loan program has been running for over 70 years, and within this period, several types of VA loan scams have been reported. These scams are classified under three major categories, namely: cash out refinance, same-rate refinance, and equity skimming.
Lenders who employ these tactics often convince the borrower to borrow (or take) some money from the equity the latter already had in place. If this happens, the mortgage starts over from zero. Let’s say borrower has already paid ten years’ worth of their 25-year mortgage, but with a cash-out refinance, they still have to pay another 25 years’ worth of mortgage, including the fees that it would incur! In other words, this scheme ‘churns’ funds at the expense of the borrower, causing significant financial losses and the piling of repayment bills.
With the same rate finance, a lender lures a potential client into availing loan that has lower interest rates compared to other plans, but the repayment period is significantly longer. Here’s an example:
Let’s presume Client A was granted a mortgage worth $300,000, with an annual interest rate of 3% for 30 years. For about ten years, Client A religiously paid $1256.11 monthly. This means that if he continues paying the same rate in the same timeframe, the client will only be paying a total of $453,454.77, including the interest.
However, if the same client falls into a same-rate refinance scheme on his 10th year, he will retain his low-interest rates, but his repayment period will be extended for another ten years. If the client agrees to this scheme and fails to look into the consequences of this type of refinancing, he might incur significant financial losses later on.
Equity skimming is probably the most fraudulent category in this list. Although the first two categories in this article could be borderline fraudulent in some situations, equity skimming cannot be justified as a marketing ploy at all. It involves a lender (or somebody who poses as a legitimate lender) “skimming” or removing a borrower’s name from the title or the equity, and eventually abandons the borrower. Equity skimming usually happens to a borrower who is having a difficulty making on-time payments for his mortgage.