Mortgage scams target vulnerable people and cost them large amounts of money. Here are some common mortgage scams and what you can do to avoid them.
The mortgage industry moves vast amounts of money, enabling millions of people to achieve the dream of homeownership. Unfortunately, wherever there’s money, there will be unscrupulous scammers willing to take advantage of vulnerable people.
The saying “if it seems too good to be true, it probably is” offers useful guidance when it comes to mortgage scams. The following is an overview of various types of fraud you may encounter, and tips on how to avoid them. Whenever you’re in doubt, a qualified real estate professional can help.
Who is at risk for mortgage scams?
Mortgage scams tend to target people with offers that seem too good to pass up. Scammers often draw people in by telling them what they want to hear. People who are at particular risk for targeting by mortgage scammers include:
People experiencing financial problems: This may include homeowners who have lost a job or are facing foreclosure, as well as prospective homebuyers who worry that their credit is not good enough to qualify for a mortgage.
First-time homebuyers: People who are not familiar with real estate sales and finance could be vulnerable to unrealistic promises by scammers.
Older homeowners who qualify for reverse mortgages: Seniors have long been a favorite target of scammers. A reverse mortgage can be a very good deal for an older homeowner, but it can also be the subject of many different kinds of fraud.
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How to Spot Mortgage Scams
Scammers are constantly coming up with new ways to defraud homeowners and homebuyers. Some features persist through many kinds of mortgage scams, including:
Terms that seem too good to be true: An interest rate that’s far below what any other lender is offering, an assurance that bad credit doesn’t matter, or a loan amount in excess of what you can repay is often a sign of a scam.
Unsolicited offers: Scammers often look for people they think fit into a vulnerable category and bombard them with offers.
Upfront fees: Loan products or services that require payment of fees at the beginning of the process should be approached with great caution.
Suspicious guarantees: Lenders cannot legally promise or guarantee changes to a loan agreement. Scammers are not so restrained.
Common Mortgage Scams and How to Avoid Them
“Bait and switch” scams
Sometimes a simple gut check can help you avoid a scam. Offers that differ significantly from other mortgage products are often highly suspect.
A lender might perpetrate a mortgage scam by promising something they cannot deliver or misrepresenting what a loan product can do. Suspicious features might include:
Unreasonably low interest rates
Loan amounts greater than what you can repay
Discounting the importance of your credit score
Using inflated values, such as your income or the value of your home
Scammers often follow these offers with bait-and-switch tactics that leave the borrower stuck with a higher interests rate, additional fees, or other less favorable terms.
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Loan estimate fraud
Lenders must provide a Loan Estimate once they receive a mortgage application. Failure to honor that estimate could be a sign of a scam.
The Real Estate Settlement Procedures Act states that lenders must honor their Loan Estimate. This document provides a prospective borrower with the estimated interest rate, monthly payment, and closing costs. A lender cannot alter these figures in the absence of specific changed circumstances.
Wire fraud phishing
Scammers may pose as a legitimate title company or real estate brokerage in order to send fraudulent wire instructions. It is crucially important to verify all wiring information before sending any money.
“Phishing” involves fraudulently soliciting sensitive information online by posing as a legitimate business. In this case, a scammer might hack into a title company’s email system or spoof an email address in order to send wiring instructions to a homebuyer. If the buyer uses those instructions, the money will go to the scammer, not the title company.
A common practice among predatory lenders is to encourage borrowers to refinance a loan on terms that help the lender, but not the borrower. You should carefully review the terms of a proposed loan, including all of the costs associated with it, to see who benefits from it the most.
Every time a homeowner refinances their mortgage, a lender earns fees. Loan flipping is the process of encouraging or inducing a borrower to engage in a series of refinances at unnecessary expense to the borrower. Laws like the Truth in Lending Act require lenders to disclose the fees they collect from making a loan. Many states’ consumer protection laws allow borrowers to recover damages from lenders that engage in loan flipping.
Foreclosure relief fraud
Scammers may target homeowners who are facing foreclosure, offering them what might seem like relief. They might even falsely represent themselves to be part of a government foreclosure relief program. Homeowners should always verify the identity of anyone who contacts them about foreclosure relief, and they should make every effort to resolve the issue directly with their lender before turning to a third party.
Foreclosure is one of the most stressful ordeals a homeowner may face, and scammers take advantage of that desperation. One common foreclosure relief scam involves posing as a government relief program and offering to renegotiate with the lender on the homeowner’s behalf in exchange for payment of an upfront fee. This fee, of course, is the scammer’s only actual goal, and it might be the last the homeowner ever hears from them.
Reverse mortgage fraud
Reverse mortgage fraud preys on vulnerable seniors, often by falsely claiming to be affiliated with legitimate government programs. Avoiding unsolicited offers goes a long way towards avoiding reverse mortgage fraud, along with being wary of “too good to be true” offers and refusing to sign anything without a thorough explanation.
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The federal government insures one type of reverse mortgage, known as home equity conversion mortgages (HECMs). Scammers might fraudulently claim to offer a wide range of benefits through insured HECMs. These scams can get senior homeowners involved rather deeply in fraudulent activity.
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