Top 10 Common Mortgage Scams to Avoid

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Top 10 Common Mortgage Scams to Avoid

Every industry has its bright lights and undesirables. There is no exception in the mortgage sector. The biggest purchase that the majority of customers will ever make is a mortgage. This increases the significance of choosing the best mortgage lender. In order to prevent falling prey to a mortgage scam, it’s also critical to know how to recognize one.

Common Types of Mortgage Scams

Scams involving mortgages may take many different shapes and aim at various consumer groups. For instance, loan modification scams target current homeowners who may be looking for loan modifications as a means of financial relief. Scammers take advantage of this by offering homeowners better mortgage conditions before stealing their money and taking off.

Borrowers who are getting ready to close on a house loan are the target of another kind of fraud. This kind of fraud often uses phishing techniques in an effort to get your account information. If successful, fraudsters may divert wire transfers for your down payment or closing costs to go to their own accounts.

Scammers may use reverse mortgages as a way to attempt to steal money from unwary customers. A homeowner may receive payments from the equity in their property via a reverse mortgage. The aim of scammers is to steal the equity of the homeowners, regardless of the methods they use.

Loan flipping or persons posing as real estate agents are two further mortgage fraud schemes. Loan churning, also known as loan flipping, is the practice of continually refinancing the same loan to increase the lender’s costs. Real estate agent fraud may entail an effort to convince a buyer to buy a house using forged papers or by concealing crucial facts about the property in order to earn a fee.

Important

The Federal Bureau of Investigation should be notified by anybody who thinks they have come across a mortgage fraud.

How to Spot a Mortgage Scam

Mortgage fraudsters may provide certain telltale signs that they aren’t fully trustworthy. However, it could be more difficult to identify a mortgage fraud in other situations. Here are some of the most typical warning signs that might point to a mortgage fraud when you start the application process.

1. Not taking into account your ability to pay

No more than 28% of your total monthly income should go toward your mortgage. Your mortgage company should ask you a lot of questions about your money, but it is not their responsibility to construct your family budget. If it doesn’t, you probably shouldn’t let them handle your mortgage.

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2. Not getting the option to purchase points

A “point” or “discount point” is similar to paying the interest on your mortgage early. To reduce the amount of interest they will pay on the loan, borrowers buy points. You should have the opportunity to buy points from your lender to reduce your interest rate.

3. Excessive loan costs

No matter how much you borrow, a large portion of the loan fees are fixed. The closing fees of your mortgage should range from 2% to 5% for bigger loans. The cost of borrowing less than $150,000 might be more than 5%. Some lenders may include fees in the loan by increasing the interest rate, but they should be upfront with you about this. Always ask different lenders how much the proposed loan would ultimately cost you. And if the charges are much more than 5%, find out why before accepting the loan.

4. Prepayment penalties

Lenders may impose fees if you pay off a loan early for several types of loans. Your loan documentation must inform you of these prepayment penalties. Ask for a loan with little or no prepayment penalties if you see it.

5. Brokers and lenders who don’t clearly disclose how they are paid

If you’re working with a mortgage broker, ask how they will be paid. Brokers are paid a percentage of the total loan and must disclose what they earn. Mortgage bankers, banks, and direct lenders can charge extra without disclosing what they are making.

Note

In homebuying transactions, it’s typically the seller rather than the buyer who is responsible for paying the real estate agent’s fees.

6. “Bad credit doesn’t matter”

If you see this, don’t call, don’t email, and don’t say yes to anything if the company approaches you. These loansare probably predatory in nature and will almost certainly come with terrible terms. These types of loans normally target lower-income individuals who are more likely to have damaged credit.

7. Balloon payments

A balloon payment is a lump sum due at the end of the loan term. Sometimes the balloon payment can be as high as the amount originally financed. Balloon payments are not allowed on homes with a qualified mortgage. Carefully evaluate if a balloon payment is right for you.

8. Income or home value inflation

A lender shouldn’t help you qualify for a loan by inflating your income or the value of the home. First, it’s not ethical or legal, and second, you can’t afford the loan anyway. If they’re willing to lie for you, they’re willing to lie to you. Not a company whose business you want.

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9. No good faith estimate

Within three business days of receiving your mortgage application, a lender must provide a good faith estimate (GFE) (GFE).The GFE provides you with basic information about the loan including estimated costs of the loan. The estimate comes on a standardized form issued by the U.S. Department of Housing and Urban Development (HUD) (HUD).If it comes on any other form, or you don’t receive the GFE within three days, don’t work with that company.

10. Fees different from the GFE

Your good faith estimate will contain an itemized list of costs associated with the mortgage with some very exact figures. Based on certain factors, it won’t necessarily remain unchanged when you receive the final mortgage paperwork to sign. Some of the fees are allowed to change by as much as 10%. Others shouldn’t change at all. For more on this, read the Consumer Financial Protection Bureau’s explanation of fees.

How to Avoid Mortgage Scams

Doing your due diligence and being aware of common mortgage scam red flags can help you to avoid them. Some of the ways you can do that include:

  • Finding a reputable mortgage lender via comparison shopping (you may speak with a HUD-licensed counselor to check a lender’s qualifications)
  • Asking inquiries about any unsolicited loan offers you may get and the sender (asking questions can be the fastest way to root out a potential scammer)
  • not paying a loan ahead without a documented justification of what the money will be used for
  • preserving your personal and financial data and being wary of any unsolicited demands for either one coming from someone posing as a mortgage lender
  • From the minute you submit your application until you sit down at the closing table, read the small print on every loan paperwork you get.
  • Avoid lenders that forbid you from discussing the conditions of your loan with a licensed credit counselor, attorney, or financial advisor
  • Any offers that look too good to be true should be questioned since it is a sure sign that they are probably not what they seem to be.
  • Refusing to cooperate with lenders or estate agents that harass you or seem to be attempting to push you into a contract
  • Checking the credentials and legitimacy of every person engaged in the mortgage process, from your lender to the closing lawyer

Tip

Asking friends and family for referrals or recommendations could be a good way to find a reputable mortgage lender.

  Closed-end Mortgage

What to Do if You Think You’ve Been Scammed

If you think you’ve been scammed during the mortgage process, there are some things you can do to minimize the damage. The first is reporting it through the proper channels. Specifically, you’ll want to:

  • Inform your lender or mortgage servicer of what you believe has transpired.
  • Inform the Federal Trade Commission, Consumer Financial Protection Bureau, U.S. Attorney’s Office, state and local authorities, and the FBI of any suspected fraud.
  • Speak with a HUD-certified counselor to learn about potential fixes or treatments.

The sooner you report suspected mortgage fraud, the sooner you can be on the way to getting some recourse for any financial losses you’ve incurred.

How Do Mortgage Scams Work?

Mortgage scams can take different forms but primarily work by defrauding consumers out of their money. For example, debt relief scams target people who may be seeking loan modifications, while closing cost scams target people who are preparing to pay their closing costs for a home loan.

How Do You Know if a Mortgage Is Legit?

Research is the first step in locating a trustworthy loan provider. For instance, you may look at the credentials of the lender, their BBB rating, and customer testimonials. If you have concerns about a specific lender, you may also talk to a loan counselor who has received HUD certification.

How Do I Protect Myself From Mortgage Scams?

Researching mortgage frauds is the greatest defense against them. You may prevent a mortgage loan fraud by comparing lenders, examining lenders’ ratings and reputations, carefully reading loan documentation, and avoiding any circumstances that put you under pressure or feel uncomfortable.

The Bottom Line

The adage is still accurate today. It’s untrue if it sounds too wonderful to be true. Don’t succumb to predatory lending practices that might lock you into a loan with bad conditions that is out of your price range.

Utilize the several resources that are available to you to assist in mortgage selection. Talk to your bank or credit union about predatory lending, including warning signs to look out for, and if you’re interested in a reverse mortgage, find out how to recognize warning signs in this area of lending.

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