VA refinance in 2018: How to avoid the scammers
Beware! Scammers operating
Are you considering a VA refinance in 2018? Then take care.
Unscrupulous con artists are targeting veterans and servicemembers who want to refinance; some with VA loans have suffered real losses.
Read on to discover how the scams work…and how to avoid them.Click to see your VA loan eligibility (Dec 13th, 2018)
A real issue
There’s a bipartisan initiative in the U.S. Senate. No, really!
There’s an issue so bad legislators are reaching across the aisle in an attempt to resolve it. And, in tody’s confrontational atmosphere on Capitol Hill, you know that issue must be serious.
It is. The proposed measure seeks to “protect veterans from targeted predatory home loan practices,” according to a Congressional website.
So, on January 11, U.S. Senators Thom Tillis (R-NC) and Elizabeth Warren (D-MA) introduced the “Protecting Veterans from Predatory Lending Act of 2018.” They had the backing of 10 co-sponsors, five Republicans and five Democrats.
The picture below depicts the top scams against veterans, according to the VA Office of Inspector General.
“Unfortunately, a few bad actors are taking advantage of the [VA home loan] program as home lenders have begun targeting veterans and servicemembers to generate profit and fees at their expense, often leading to higher loan amounts and putting families in a worse financial position than they started off,” observed Senator Tillis.
Even the mortgage industry’s trade body is condemning the practice. When the Mortgage Banking Association testified before Congress, it backed stronger policing.
There are two main scams and both involve “churning.” That’s when lenders encourage those with VA loans to refinance when it provides no or little benefit. This is also known as “equity stripping,” because it the scammers may suck the equity out of your home, unnoticed by you because you pay nothing out-of-pocket for your refinance.
But churning is intended to line lenders’ pockets — at the expense of borrowers.
Scam 1 — The cash-out refinancing
When you’re short of cash, you may want to dip into some of the equity you’ve built up in your home. That process is called a cash-out refinancing.
Unfortunately, there are some downsides to this. It means you’re resetting the clock on your mortgage. So, if your 30-year mortgage has 25 years left to run, you’re back to facing another 30 years of payments. A refinance usually comes with lender and other third-party charges, whether you pay them out-of-pocket or not.
But lots of people do it. And, in the hierarchy of dumb financial moves, it’s a long way down the list. Indeed, it can often be smart. So you may perfectly sensibly undertake a VA refinance in 2018.
However, scammers try to get borrowers to refinance in this way repeatedly. But that keeps resetting the clock. And keeps putting fees from closing costs into lenders’ pockets. So the lender profits at the borrower’s expense.
Scam 2 — The bad refinance
Generally speaking, it’s a good idea to refinance to a lower interest rate. Your monthly payments are lower. And your overall cost of borrowing falls. What’s not to like?
It depends on what you have to do to get that lower rate. Suppose that you have a $300,000 mortgage at a 4.25 percent interest rate that you’ve been paying for five years. Your current balance is $266,170, and your principal and interest payment are $1,476.
You could lower your payment to $1,309 by refinancing without even changing the interest rate. That’s because you’re stretching out the repayment of the remaining balance to a new term, extending your repayment by five years. An unscrupulous lender will refer to the $167 a month difference as “savings.” But clearly you are saving nothing — in fact, you’ll pay more.
Most lenders don’t just offer to refinance your old loan at the same rate, however. They offer a lower rate, at a cost and are so nice that they offer to do the loan at no out-of-pocket cost to you. For instance, you might get a 3.75 percent mortgage rate, at a cost of three points (3 percent of your loan amount), plus other fees — perhaps a total of $10,000. Your new payment drops from $1,476 to $1,279, “saving” you nearly $200 a month and your new balance is $276,170, costing you $10,000 of home equity and extending your repayment by five years.
Other ways to lower your interest rate include refinancing you into an adjustable rate mortgage (ARM), which usually carries a lower rate than a similar fixed loan. After the loan’s introductory period (which can be anything from one month to ten years), the rate and payment can increase.
That’s fine if you understand this, and especially if you plan to sell or pay off the mortgage before its rate begins resetting. The “iffiness” occurs only if the terms of this new loan are not disclosed to you.
The same could be said of the 15-year mortgage. Rates for these programs are lower than those of 30-year loans. They can be smart choices because you get a lower rate and pay your loan off faster. You need to know that the payment is higher and you need to be comfortable with this.
The U.S. Department of Veterans Affairs is just one body that is warning of these scams. On its website, it tells of some of the more common complaints and issues it’s observed.
These include unsolicited communications that can misleadingly appear official. Advertisements, literature and aggressive sales pitches that misleadingly offer too-good-to-be-true benefits. Some of the promises that are commonly made and subsequently broken include:
- Ultra-low interest rates (which apply only if you refinance to an ARM or a much shorter loan)
- Unfeasibly high cash-out sums
- Skipped mortgage payments (banned by the VA)
- No out-of-pocket expenses (when those, in reality, are added to your mortgage balance)
- Refunded escrow balance (Well, yeah. Maybe. But you’ll likely need to fund a new escrow account)
It’s important to know one thing — the government does not set VA mortgage rates. The government does not require you to pay fees other than the VA funding fee. Nor does the government require you to refinance with your current lender or any lender for that matter.
VA streamline refinance
The VA streamline refinance (formally known as the Interest Rate Reduction Refinance Loan, or IRRRL) is sometimes the vehicle for these scams. And you can see why.
The VA wanted to make refinancing from one VA loan to a new VA loan cheap, easy and straightforward. It eased up on many bureaucratic procedures but that may have left IRRRLs more vulnerable to abuse.
However, that doesn’t mean a VA streamline refinances can’t give you fantastic deals. They typically do. It just means you need to choose your lender with care and that’s easy.
A safe VA refinance in 2018
How easy? Well, you can request VA refinance quotes from multiple lenders in a matter of minutes using websites like this one. With lenders licensed in your state and approved by the VA to refinance your home loan.
And that will allow you to compare different offers. Maybe your existing mortgage provider or a company that sent you a solicitation will turn out to be your best bet. Although, you won’t know that for sure until you’ve done your comparison exercise.
Loan estimates and closing disclosures
Then, when you apply to lenders, you need to make sure the “loan estimates” (standard documents detailing your provisional deal) they send you compare with their offers. Those loan estimates should be given in good faith and lenders shouldn’t change anything without a good reason, which must be explained to you.
Later, at least three days before you close, you’ll get a “closing disclosure” that sets out all the terms of your new mortgage in an easy-to-understand format. That’s your last chance to make sure you’re getting the deal you want — and the one you were promised — without derailing your refinance.
Double time — away
You still have one last chance to call the whole thing off because you only commit yourself when you sign the closing documents.
So, if you smell a rat, just walk away. You can always start again with some new quotes. You have only one priority: to get the best VA refinance in 2018 you can.Click to see your VA loan eligibility (Dec 13th, 2018)