Taking out a loan to fund your renovation is one of the biggest financial decisions you’ll make in your lifetime, and it’s important you go to a lender you can trust.
Unfortunately, there are some predatory lenders and loan scams out there that you should be aware of and avoid at all costs.
If you use a renovation loan service like RenoFi that works with an elite group of credit unions that you can choose from, lenders are pre-vetted and you don’t need to worry about any red flags.
However, if you’re researching lenders yourself - there are some red flags you should keep an eye out for during your research before you pick the best lender and loan option for your remodel.
Here are the top three red flags based on what we’ve seen in the renovation loan industry:
The rates, fees, terms seem incorrect or vague
Oftentimes in loan advertisements you’ll see interest rates that seem very low. These are called the “as low as” rates. Only applicants with the best conditions, like a high credit score, for example, will be eligible for these rates.
But if a loan officer gives you a rate that is exponentially higher than the “as low as” rates, you should look into why there’s such a large difference. Sometimes, it’s because of your specific renovation project and your financial situation. And that’s okay. Be sure to ask your loan officer and if they give you a trustworthy explanation that makes sense based on the numbers, that’s a good sign.
However, it’s always a good idea to get rates from another lender to make sure that you aren’t being scammed.
Similarly - make sure you’re aware of any fees. You should know how much they are and what they’re for. If your lender surprises you with high administrative fees at the last second, that’s a red flag.
Certain fees for underwriting or appraisal are standard, but some predatory lenders try to suck consumers into paying other fees that aren’t typical. Make sure to read everything closely.
The loan officer pressures you into signing quickly
Deciding to take out a loan to pay for a renovation is a major financial decision that shouldn’t be made quickly. Most renovation loans are paid over a 10-30 year time period, just like a mortgage.
Renovation loans also come with lots of complexities, like fixed or variable rates, potential prepayment penalties, and even closing costs or insurance.
If a lender is pressuring you to sign quickly, won’t answer questions, gives incomplete answers, or won’t respond to your communications, that is a major red flag.
Your lender should be able to explain everything about the loan in detail and give you the resources and time to make a decision.
Predatory lenders and scammers want you to sign as quickly as possible before you fully understand the loan itself because they’re running a shady business that relies on taking advantage of homeowners.
The lender isn’t concerned about low credit, high DTI or your ability to pay
Getting a loan is especially difficult for folks with low credit, a high debt-to-income ratio (DTI) or a low or unstable income.
If you’re in one of these categories, you’ll probably be limited to certain loan options and lenders will require extra documentation or explanation to approve you for a loan.
While this can be frustrating, you should feel secure in knowing that your lender cares about your ability to pay for this loan in its totality and that they think it’s a good decision for you.
It’s a red flag if your lender doesn’t seem concerned or care about below-average aspects of your financial profile.
It’s an even bigger red flag if your lender encourages you to lie on the application by fudging some numbers or omitting certain information. If your lender does this, you are probably being scammed and should put a pause in your process.
How to find the best renovation loan lender
If you’re having trouble finding the right lender for a renovation loan, consider using a service that can match you with a credit union or bank that has the perfect loan option for you!
Services like RenoFi will vet lenders for you through partnerships with an elite group of lenders nationwide.
You can get an estimate and example lender in 90 seconds by clicking the button below.