What Is Loan Flipping in Real Estate? - Learn How To Protect Yourself

What is loan flipping? Loan flipping occurs when lenders coax and convince homeowners to refinance their homes repeatedly. Moreover, lenders persuade homeowners to borrow more and more each time.

As time passes, borrowers end up with a lot bigger loan payments. This is where the trouble starts. Because now, the borrower can’t afford loan payments and lowers the hard-acquired equity of their real estate. And all the while lenders charge points and fees with every transaction.

The most typical victims of loan flipping include senior citizens and those who aren’t educated on borrowing. Predatory lenders take advantage of them by advancing loan flipping even though the borrower doesn’t need it or by presenting “a better loan” than one currently employed.

Luckily, lenders using predatory strategies can be held accountable by a wronged borrower. If a lender recently convinced you to refinance your loan, but made you accept excessive fees or unfair agreement terms, contact a licensed attorney. And ensure you’re familiar with common real estate scams.

Or even better, don’t get to the point where you need to seek professional assistance. This article will discuss what loan flipping is, the common tactics that loan flippers use, and how you can protect yourself from predatory lenders.

What is Loan Flipping?

The loan flipping definition tells that loan flipping is a predatory lending activity that happens when lenders convince borrowers to refinance their homes by accepting a new long-term loan with higher costs. Even though the new loan doesn’t actually provide any financial advantage to homeowners in any possible way.

The lenders may promise the borrower a lowered term or monthly payment, but in the end, the borrowers end up with costly payments they can’t pay and that drains their real estate equity.

While loan flipping appears like a great deal, it is only so at first glance. The additional points, fees, and expenses of the loan can place borrowers in situations that don’t suit their best interests. Although loan flipping and new loans provide the borrower with a few bonus thousand dollars, the benefits are quickly dissolved.

Loan flipping or loan refinancing can in this way drain the borrower’s equity fast. It will also increase monthly payments. Particularly if the borrower’s loan is flipped multiple times during a short period of time.

Balloon Payments

Even worse, loan flipping may produce quite dangerous financial situations for the borrower if balloon payments are accepted. You can usually find them in the contract’s fine print.

Predatory lenders achieve this by first charging a low rate for the loan, but then include big amounts of lump-sum payments. Often two, three, or more years down the road. As the loaning period reaches its end, borrowers are pushed to refinance their homes again. Or even worse, lose their homes completely.

Victims of Loan Flipping

Predatory lenders employ loan flipping to force homeowners to repeatedly refinance their real estate. Since they know they can’t try this with everyone, they search for those who will more likely fall for their predatory lending practices. Or those they believe they can exploit.

Senior citizens have the biggest risk of falling for their scams. This is since senior citizens often have enormous equity built into their real estate. Moreover, senior citizens are often not educated enough about the financial intricacies of borrowing.

Not to mention they’re more trusting to people and rarely imagine someone will intentionally exploit their age. And last but not least, senior citizens often have cognitive issues that predatory lenders happily exploit.

Minorities are also at greater risk here since predatory lenders know minorities are often in more dire financial situations. Moreover, lenders count on minorities being more afraid to contact the law if they spot illegal lending behavior.

In addition, predatory lenders also target financially vulnerable people. Such as individuals who can’t meet monthly costs. Or folks who recently lost their position. Even those who experienced lending discrimination because of a lack of education.

How to Spot Predatory Loan Flipping

If new lenders are intentionally and actively reaching you via mobile, email, or mail, this is a likely red flag on their side. Yes, all lenders have marketing and do it. However, if some lenders are especially aggressive in their approach this may mean you should take care.

Especially if you have never contacted or even heard about the company. That’s why it’s always better to find local companies that your friends or family has already employed. Work with lenders that you know.

How to Protect From Loan Flipping

Know What You Can Afford

The first step in defending yourself against loan flipping is that you know and understand what you can afford. Most of us are in the habit of spending more than we earn. However, this doesn’t mean you should risk your house just because you need an extra thousand bucks.

Find Credible Lenders

The next step is that if you need a new loan, you find a licensed, reputable lender. Hopefully, local ones whom your family and friends already know or have worked with in the past.

Educate Yourself

You should also educate yourself. Learn and understand loan contracts and applications. Learn the most common predatory lending activities as well. The more you know, the safer you’ll be. When you’re more financially literate you’ll spot red flags that follow questionable lenders.

You can also find tips about protecting your real estate when you take a mortgage at FDIC (the Federal Deposit Insurance Corporation).

Explore Different Options

Take a look around for different loans before you sign your first. Even if you have experienced loan discrimination before (which is understandable), that doesn’t mean you should hurry up the process as fast as possible. Yes, you want to get done fast. But when you compare offers, you’ll definitely find that some are better than others.

Use Alternative Financing

You can also think about the alternatives. Instead of borrowing money from questionable lenders or going for loan flipping, why not ask your friends? Family? Religious congregation? They will likely produce less financial harm than a lender you don’t know.

Don’t Lie

Moreover, you should never inflate your earnings. Even worse, give out false information so you can qualify for a loan. This is because the lenders’ borrowers' qualifications depend on how much the individual or family earns.

Don’t Bet on Future Profits

Last but not least, never bet on increasing your income in the future. There are no certainties in life. Except that you may face the loss of your real estate or your equity in it if you took a loan you can’t repay due to unexpected circumstances.

State and Federal Laws on Loan Flipping

Various federal, state, and even local laws are currently trying to prevent and minimize predatory lending practices. For example, The Truth in Lending Act, also known as TILA, obliges a lender to disclose particular specific info before you enter a contract with them. For instance, the total cost to borrowers, the yearly percentage rate, and the contract’s terms.

Since July 1, 2002, the state of California has had a law that covers “high fee/high rate” loaning. This law includes particular rules involving balloon payments, the borrowers’ ability to return the loan, prepayment penalties, and more. The law also states that all loans must have tangible advantages to the borrower.

Find the Right People

If you are in dire need of money, a better option than taking out a loan could be to sell your house. Contact SleeveUp Homes and we will buy your house for the highest price possible. You’ll be able to sell your home fast. Even better, you won’t have to repair it, show it to potential buyers, or wait for it to sell.

Predatory lenders are giving the whole industry a bad name. That’s why we’ve decided to start SleeveUp Homes - so we can help local homeowners sell their houses and make our community better. Request a no-obligation cash offer and see if selling your house is a better option than taking out another loan.

Author:

Cesar Gomez , Broker /

Cesar has worked as a real estate agent and broker in the southern California region since 2013.

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