Types of Mortgage Scams & How to Protect Yourself

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Are there mortgage scams? Absolutely, and these mortgage fraud and scams are everywhere. In 2021, the federal Bureau of Investigation’s Internet Crime Complaint Center reported 11,578 victims of rental or real estate fraud resulting in a loss of over $350,328,166.

There are several things you need to put in check when buying a home, to avoid losing your money to predatory lenders, fraudulent real estate agents, trap borrowers and the like. This move is mandatory, just to avoid any form of fraud.

What is Mortgage Fraud and How Do They Work?

Mortgage scam or mortgage fraud is simply regarded as a deliberate attempt to omit or falsify information. Mortgage scams take many different forms and target different types of consumers. For instance, there can be a deliberate attempt to omit or falsify information used by a lender to credit, procure or insure a mortgage loan. Both borrowers and lenders can be perpetrators of this crime.

Again, loan modification scams can also be aimed at existing homeowners seeking debt relief in the form of loan modification.

Apparently, most mortgage businesses are somewhat traced to financial crimes because housing is one of the most valuable and basic needs of man.

Reasons for Mortgage Scams

There are several reasons as to why an industry player or a borrower would want to engage in mortgage scam.

Players in the housing industry go into mortgage scams for profit making by presenting fake financial information of their clients, in order to get more profits from the transaction. This criminal practice can be executed by any industry involved in the loan processing; be it the appraiser, mortgage banker, or the estate agent.

Also, borrowers decide to engage in mortgage fraud just because they wish to still keep their current house or purchase a new one. These lenders feel that they may not get approval when they apply for a housing loan with their original identity. Instead, they provide fake information related to debt, income and employment, so as to increase their chances of getting loan approval.

Are mortgage scams so common among borrowers? Unfortunately, yes. In fact, one in 200 refinances applicants and one in 164 mortgage applicants have indications of fraud. So, you need to look at the different types of mortgage frauds to avoid them.

13 Ways to Detect Mortgage Scams

Mortgage scammers often give off some red flags but in the end it’s always about how much you do know about mortgages to protect yourself from them. Here are some common red flags to help you spot and avoid mortgage fraud.

1. Interest Rates are Too Good to Be True

If the mortgage rates seem lower than market interest rates, this is one of the biggest mortgage scams. In this case, a predatory lender may con you into thinking you were getting a rate that is too good to be true. So, when you’ve signed some documents, they may try to tell you that you no longer qualify for the advertised rate. Or they might try to add on some additional fees, after locking in the original rate.

2. Your Loan Estimate isn’t Honored

Do realize that under the real estate settlement procedures act (RESPA), your mortgage lender must honor the loan estimate within the relative tolerance level. Your loan estimate is the basic loan information in a standardized format from the U.S Department of Housing and Urban Development. It contains itemized costs of a loan, including fees that is sent within 3 business days after applying for a mortgage. Your lender isn’t allowed to charge fees outside of the credit report fee before accepting the terms.

3. Mortgage Payment Scams

Generally, your mortgage payment should be about 28% of your monthly income. However, you become riskier for your mortgage lender, if your debt-to-income ratio is high. Hence, your lender wouldn’t want to go over 28% of your monthly income. So, if a lender offers a loan larger than 28% of your disposable income, be careful.

4. Home Overvalued

Overvalued properties are a great risk for legitimate mortgage because it generates inaccurate resale valuation or an inflated borrower income that would be challenging to pay on existing income. Hence, you should always have the home valued carefully before purchase

5. Penalties For Prepayment

You pay a pre-payment penalty if you pay off your mortgage or refinance quickly. Typically, prepayment penalties would offer lower overall interest rates, but are often times hidden in the fine print of agreements. Some borrowers don’t know about the stipulations of these penalties and are hit with it down the line. Hence, you should always read the fine print of every agreement carefully.

6. “Your Credit Score Doesn’t Matter”

Your credit score will always affect your mortgage rate. There is no exception. So, if you are offered a home loan that states your scores won’t matter be careful. This is usually how mortgage scams are disguised to attract poor and unsuspecting borrowers into undesirable agreements.

7. Real Estate Phishing Scam

Another type of mortgage fraud you should be wary of, happens when preparing to close on a home loan. In this case, the scammer tries to steal your banking information. If successful, they might reroute the down payment or closing cost wire transfers into their own account.

8. Reverse Mortgage

In this case the scammer tries to steal money from unsuspecting consumers. This is one of the most common mortgage scams used to steal from seniors according to the FBI. A reverse mortgage allows a homeowner to receive payments against the equity value of their home. Scammers use different means, but the end goal remains the same – to steal the homeowner’s equity.

9. Balloon Payments

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

10. When They Don’t Care About Your Ability to Pay

No lender wants to “help” you. It’s all business to them. So, it shouldn’t be the mortgage company’s job to create your household budget and they wouldn’t want to go over 28% of your gross monthly income. If a lender claims not to care about how much you earn and how you can afford to pay – this is a dead giveaway.

11. No Option To Purchase Points

Your lender must always give you the option to purchase points that would be like prepaying your mortgage interest. Purchasing these points helps lower your interest rates.

12. Excessive Loan Costs

Many loan costs are fixed, regardless of how much you borrow. So, if you are borrowing less than $150,000, your costs could go over 5% and if you are borrowing a larger mortgage, I could be between 2% and 5%. However, some scrupulous lenders may work in the costs into your loan in the form of a higher interest – this might be okay as long as the lender discloses it. To be sure about the deal you are getting, always talk to multiple lenders, so the total costs do not exceed over 5% and when they do, there should be a clear reason why.

13. Lack of Disclosure about How Brokers and Lenders are Paid

If you are working with a mortgage broker, ask how they will get paid. Brokers ae often paid a percentage of the total loan and must disclose what they earn.  Mortgage banks, bankers and direct lenders can charge extra without disclosing what they make. Do also note that the seller normally pays for the real estate agent’s fees.

Other Types of Real Estate Fraud Everybody Needs to Know

Below are three other types of real estate frauds everybody should know and as much as possible, avoid falling prey to them:

1. Fake Identity Usage

Fraudsters always use fake identity to carry out mortgage scam. This happens when a fraudster receives funding by making use of the financial information of a stolen identity, including fake employment details and Social Security Number. Their aim is just to get a fake mortgage on property they don’t own or live in.

However, it is advisable to avoid paper documents like cheques and bills, as it might pose a huge risk of fake identity usage, because they contain classified information. It is best to protect yourself when you make online payments and request for soft copies of relevant documents.

2. Property Retention Scam

It is rather painful that fraudsters take advantage of property owners at the time scheduled for concluding their housing loan repayment. In this case, property owners who are at the verge of losing their home as a result of loan default are deceived into believing they can still retain their property by using the identity of a third-party investor. These thieves then sell the house with a fake appraisal, thereby stealing the owner’s proceeds and amassing huge profits.

In this type of fraud, property owners are made to believe they can put their house on rent for at least one year and repurchase it after their credit report has improved. Sadly, these criminals do fail to make the mortgage payment and the property is not retained by the owner.

To stay protected, you should avoid making payment or sharing information with any third party until you have communicated with your borrower, and it is free of charge.

3. Property Flipping

Property flipping is commonly referred to as buying, renovating, and reselling a house for the purpose of making profit. By all standards, it is not an illegal practice. However, when a property is bought at a very low price and is sold at a profitable price with the influence of a criminal minded appraiser who confirms that the property has a higher value, then that is mortgage scam.

Also, fraud that comes with property flipping is often noticed in the compromised attitude of the flipper, the seller, and the anonymous or fake buyer. The seller goes into an agreement with the flipper to buy the property at a very low price. The flipper offers the buyer fake title insurance claims, indicating the flipper as the owner; even when it is not true, and then they make the appraisal of an increased price which the flipper and the buyer had agreed upon.

Five Ways to Avoid Mortgage Fraud

Below are five ways on how best to avoid mortgage fraud:

a. Consult a Lawyer

An experienced legal practitioner can help you verify every legal paperwork to ascertain its originality. This will help you to know where and when to send your signature.

b. Use a Legitimate Mortgage Lender

Be sure to verify a lender’s credential or connect with a HUD-licensed counselor to help you verify your mortgage lender’s identity.

c. Check the Property Title History

Conducting a title search will reveal the real owner of the house you want to purchase, as well as if there is any existing debt on the property like association dues for homeowners, property tax, or any form of maintenance fees.

d. Review Loan Documents

You can thoroughly check if the loan documents have valid information. It is an easy exercise but very critical. It involves several stages of reviewing different types of documents, and sometimes, tracing them could be difficult. So, you need to take more time to do a careful verification of the final loan documents before you make payment.

e. Find out The Property’s Actual Value

This is where you need to conduct thorough research on the property’s actual tax assessment. Knowing the actual value of the property you want to buy will protect you from being a victim of a mortgage scam. With this, you can have an idea of the price of similar homes, and how to calculate the tax value, so as to know how much you can pay for the house.

Other Steps To Avoid Mortgage Scams Include

  1. Question any unsolicited loan offers you might receive and who is sending them to you
  2. Don’t give out money upfront to a lender without having a written explanation of what the money covers
  3. Safeguarding your banking information and personal information and validating all unsolicited requires from anyone including those claiming to be a mortgage lender
  4. Always read the fine print of every document including loan documents before filling out the application
  5. Stay clear of lenders that discourage you from using a certified attorney, credit counselor or financial professional
  6. Question all offers that seem too good to be true, they just might be another type of mortgage scam
  7. Never work with a lender or real estate agent that bullies you or appears to try pressuring you into making a deal
  8. If ever you are scammed or suspect a scam, report to your mortgage servicer or lender alongside the FBI, U.S. Attorney’s Office, Federal Trade Commission, Consumer Financial Protection Bureau, and state and local authorities.

 Conclusion

Buying a home in a responsible manner will always shield you from mortgage scams. It is unfortunate that there has not been sufficient legislation from government at all levels to regulate mortgage transactions. Thankfully, some state governments have decided to take drastic steps in reducing mortgage scams. They have done this through issuing licenses to loan officers, and a robust awareness creation. Also, real estate agents and other mortgage, relevant players in the housing industry are now being monitored by the state governments, to ensure that they strictly adhere to the best practices required by law.

In the end, knowledge is always the first defense against mortgage scams. Hence, whether you own a house or wish to purchase one, always get yourself immersed in all the ins and outs of real estate. Overall, always remember that if a scheme or deal seems too good to be true, it is.

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