LOAN
FLIPPING
Flipping or "Loan
Flipping" generally refers to repeated refinancing of a mortgage loan within a
short period of time with little or no tangible net benefit to the borrower.
Loan flipping typically occurs when a borrower is unable to meet scheduled
payments, or repeatedly consolidates other unsecured debts into a new,
home-secured loan at the urging of a lender. Lenders who flip loans tend to
charge high origination fees with each successive refinancing, and may charge
these fees based on the entire amount of the new loan, not on just the
incremental amount (if any) added to the loan principal through the refinancing.
In addition, each refinancing may trigger prepayment penalties, which could be
financed as part of the total loan amount, adding to the borrower’s debt burden.
Flipping can also
occur when a “flipper” targets a first time home buyer who believes he or she
cannot afford a house or has bad credit. The “flipper” earns your trust by using
his knowledge and experience with the home buying process to make the deal seem
easy. The “flipper” promises to arrange a loan, take care of all the paperwork,
and may even let you move right in before the sale. What you do not know is that
the “flipper” bought the house cheap, made only cosmetic repairs, and is now
selling it to you for a price that far exceeds its value. You now have a
mortgage loan for the inflated sales price. The “flipper” walks away from the
deal with all the loan money, but you wind up with a house that is not worth
what you owe.
Prospective borrowers
should be aware of scams and other problems associated with some lenders,
especially if the borrower has bad credit. The
Federal Trade
Commission (FTC) urges you to be aware of these loan practices to avoid
losing your home.
Some lenders may
actually want to “steal” your equity by asking you to pad your income in order
to qualify for a loan. When you are unable make your payments the lender will
foreclose your home and “strip” you of your equity. There may be hidden costs
associated with the foreclosure or you may be forced to pay exorbitant
prepayment penalties. The
FTC recommends all
barrowers not pad their income and read the fine print to avoid these penalties.
Never rush to sign
papers. Some home improvement contractors work with lenders and may
approach homeowners with prospective improvements. When the homeowner says he
does not have the money, the contractor may offer to set the owner up with a
lender. Sometime after the contractor begins work, the homeowner is asked to
sign some papers quickly to complete the transaction. These loan papers could
even be blank. Later you find out the interest rate, points and fees are
outrageous. To make things worse, after the loan agency pays the contractor he
may skip finishing the job to your satisfaction.
Lenders may also try to
“pack” your loan with extra insurance. Here, the lender gives you sets of
papers to sign hoping you don’t notice one of them includes a credit insurance
policy. They may even tell you that if you don’t want the credit insurance, the
loan papers will have to be rewritten, and may take several extra days.
Here is another
pitfall. Let’s say you are in foreclosure and another lender offers to help.
Before he can help you, he asks you to deed your property to him, claiming that
it's a temporary measure to prevent foreclosure. Once the lender has the deed
to your property he may treat it like his own. He may barrow against your house
for his benefit, not yours, or even sell it to someone else. You may not even
get any money when the property is sold, plus he may want to charge you rent for
living there and start eviction proceedings.
Some lenders have placed "seasoning"
requirements on the seller's ownership. If the seller has not owned the property
for at least six months, the lender will assume that the deal is fishy and
refuse to fund the buyer's loan. This may be a problem if you bought a property
cheap and are reselling it quickly for a profit (the good, old American way!).
This should not be confused with LAW - it is simply an underwriting guideline
for some lenders. Of course, guidelines are just that - by going up the chain of
command, you can generally get approval from loan underwriting by showing the
property is being resold for a higher price because either it was purchased in a
distress situation (e.g., foreclosure) or that substantial repairs were made.
Keep good records of your repairs to show to the lender.
If the buyer is getting an
FHA insured loan, there is no way around the
"seasoning" issue. FHA regulations prohibit the funding of a purchase where the
seller has not owned the property for at least 90 days, NO EXCEPTIONS. This
generally should not be a problem in a fix-and-flip situation, since it will
likely take you 90 days by the time you acquire, rehab and sell. But, if you are
planning on buying the property and reselling it in a double-closing, the
end-buyer CANNOT go with an FHA loan.
Let's take care of the "illegal" claims,
first. Flipping, if done the way it was meant to be done, is completely
legal. But it becomes illegal when unscrupulous investors, working with
unscrupulous appraisers or lenders, conspire to defraud either buyers or
lenders. This is done when an investor gets an appraiser or lender to over-value
a property for the purpose of selling for a higher-than-market value, or for the
purposes of getting a bigger mortgage so the investor can pocket more cash.
Important Protection Against "Flipping"
for Low-Income Buyers -
As of June 2003, the Federal Housing
Administration will no longer provide insurance for houses resold within 90 days
of purchase. In order to prevent flipping, these
new rules require that a house be appraised again if it is sold again within
91 days to 6 months. In addition the new rules say that only those people that
are named on the official record, such as a deed or title, can legally sell the
property. This rule was designed to prevent the type of "flipping" that was
taking place in Baltimore and other urban areas. The rule is important to
low-income people because FHA insures almost
all mortgages to low-income buyers.
Borrowers should also
watch for mortgage servicing abuses. You may discover that after you signed the
loan agreement that the payments are higher than expected. This may be because
the payments include “escrow for taxes and insurance even though you arranged to
pay those items yourself with the lender's okay.” The
FTC says there may be other charges including
legal fees added to what you owe. These added fees could add to your monthly
payments and what you owe at the end of the term.
Mortgage Glossary2
