Home improvement loans are a specific type of real estate loan, used for the purpose of completing home renovation projects. These loans are generally drawn from the same types of companies that issue mortgage loans, but can also be issued independently by banks and other such lending institutions.
Home improvement loans are sometimes considered to be a type of second mortgage. However, these are different from mortgage loans in that the loan amounts are used for labor and materials, rather than the ownership aspects of the home. Home improvement loans can help a homeowner increase the value of their home, as these loans allow the homeowner to ensure that their property is safe and in good condition. Additionally, such loans frequently allow the homeowner to sell the property for a profit.
Some example of the most common uses of home improvement loans include, but may not be limited dto:
- Repairing broken or damaged property structures;
- Upgrading windows, doors, overhanging eaves, and other such structures;
- Adding an additional room or an additional story to a home building;
- Adding office spaces for at-home-business use to a home building;
- Various home gardening and landscaping projects;
- Lengthening or widening driveways, garages, or walkways;
- Building an additional guest house or storage structure in the backyard; and
- Overall maintenance and property renovation.
Generally speaking, the homeowner will determine how the additional funds are to be used. Home improvement loans are considerably easier to obtain than a full second or third mortgage, largely because the main requirement is that the borrower use the funds only for home improvement purposes and not for other uses.
Home improvement loans are similar to home equity loans, although equity loans can be used for a broader range of purposes. A home equity loan has the borrower utilizing their home equity as collateral for the loan. Such loans are generally used for larger projects and expenses, such as:
- College tuition;
- Medical expenses; and/or
- Home repair and improvement projects.
Closed end home equity loans would be the traditional, one-time, lump sum payment loan. Open end home equity loans, however, are not so much an actual loan as more of a credit line that is based on the equity. This is also called a home equity line of credit (“HELOC”).
What Is Loan Fraud?
One of the most pervasive legal issues that is associated with home improvement loans would be loan fraud. Loan fraud frequently occurs when a person falsifies their application for a loan, which can be either a personal or a business loan. An example of this would be by misstating information in order to receive better loan rates. Two other examples of loan fraud would be over-reporting income, and claiming that a piece of property is more valuable than it actually is.
It is imperative to note that borrowers are not the only party who may engage in loan fraud; lenders can also perpetrate loan fraud against potential borrowers. An example of this would be a lender providing a fraudulent loan application to a potential borrower in a real estate transaction. Doing so could cause the buyer to suffer financial setbacks, as well as miss out on opportunities to purchase other real estate.
Simply put, fraud can happen in any situation that involves a loan. Some examples of the most common transactions where loan fraud can occur involve:
- Boats or other recreational vehicles;
- Home improvement contracts;
- Credit cards or bank applications; and
- General personal loans.
In terms of loan fraud, mortgage transactions are one of the more common examples. And, to reiterate, mortgage loan fraud can be initiated by either the borrower or the bank. However, other intervening parties involved in the transaction could also engage in fraud, such as brokers or the real estate agencies. Because of this, there are many different stages of the home buying process in which fraud could occur. This includes after someone owns their property and requests to modify their loan terms.
If you are a homebuyer, it is helpful to be aware of the many different ways in which you could be taken advantage of during the home buying process. Predatory lending refers to when a financial institution offers a high interest rate loan to someone in exchange for valuable collateral, such as the deed to the property.
If the buyer cannot pay back the loan in full, generally due to the high interest rate, the lender can take the property and sell it at a much higher value in order to make a profit. This could be considered fraudulent behavior on the lender’s part if the institute conceals or misstates the term of the loan.
Alternatively, loan applicants should be aware of loan fraud tactics so that they can avoid committing loan fraud. Applicants are generally involved in loan fraud in order to get approved for more money, or to obtain loans with lower interest rates. Some common examples of mortgage fraud include:
- Exaggerating income;
- Claiming that you are employed when you do not have a job; and
- Attempting to avoid higher interest rates by claiming that you will occupy the property, when the intention is actually to buy it as an investment property.
What Are Some Other Legal Issues Associated With Home Improvement Loans?
Some other examples of disputes and legal issues that are frequently associated with home improvement loans include:
- Zoning and land usage disputes;
- Disputes over qualifications, such as whether the loan applicant is actually qualified to receive the loan; and
- Disputes involving repayment and/or defaults on the loan.
An example of this would be if a person uses a home improvement loan in order to build another story or higher structure on their property. If this new structure obscures a neighbor’s view or access to sunlight, it could be considered a zoning or land usage issue, which may require further legal filings in order to fully resolve the dispute.
Another example of a common legal issue would be the breach of a home improvement contract. The actual improvements are generally carried out by a construction company. This will involve yet another contract between the homeowner and the construction company, which can be subject to breach.
Other legal issues can arise if the borrower uses the money improperly. An example of this would be how the borrower might obtain a home improvement loan, but then uses the money for other things such as personal expenses, shopping, vacations, and the like. This would likely constitute a breach of contract, especially if the lender has specified that the money is only to be used towards property improvements
However, this will largely depend on the specific provisions in the home improvement loan contract. Although it is difficult to regulate whether the money is actually being used towards home improvement, many state laws prohibit such activity in an effort to reduce the practice.
Do I Need A Home Improvement Loan Lawyer?
If you wish to obtain a home improvement loan, or if you are involved in any legal issues associated with a home improvement loan, you should consult with an experienced and local mortgage attorney.
A local lawyer can inform you of your rights and legal options under your state’s specific laws, and can review any contracts prior to you signing them. Additionally, they will also be able to represent you in court, as needed.