Few things are as devastating as the possibility of losing a home, whether it's the dream property you're about to purchase or your home of 20 years. Scammers and unscrupulous lenders take advantage of this desperation. Campaigns have been launched by the federal government, state governments and consumer organizations to make homeowners aware of the many faces of mortgage fraud.
This guide will:
- Discuss the most common mortgage frauds and scams
- Reveal which homeowners should be most on guard against scammers * Share leading experts' advice on how you can protect themselves against fraud
The Most Common Types of Predatory Lending and Mortgage Scams
Predatory lending is any kind of financial lending that convinces a borrower to accept unfair terms through coercion and deception. This kind of lending benefits the fraudulent lender, not the borrower.
Predatory mortgage lending takes place when a lender entices and assists a borrower into taking out a mortgage that carries high fees, high or variable interest rates, drains a borrower's equity, or negatively effects the borrower's credit score. Worst case scenario includes unwittingly signing over the deed to your house for a promise of debt rescue or cash that never comes.
When You're Buying a Home
BEWARE: Offering Inappropriate Interest Rates
Your loan officer steers you toward a higher interest rate than you qualify for, or a low interest rate with prepayment penalties or a balloon payoff.
Why it's wrong
Ideally, you should be able to pay off a home loan in your lifetime. While it's true that no matter what your interest rate is, if you have a mortgage amortizing over 30 years, then for the first few years you'll mostly be paying off interest. However, if your interest rate is too high for you to afford, you may struggle to earn equity, much less ever pay off your home. If you have a low interest rate with a balloon payoff, you may have to pay off the balance of your house within 5 to 7 years. If you can't do that or refinance, you may lose your house.
- An interest rate that feels "too good to be true." Shop and compare. If your lender is offering you a rate lower than anyone else, there's probably something fishy going on, such as higher payments or points—a percentage of the total mortgage paid up front—that you'll end up paying somewhere else.
- A bid for you to act quickly without giving you time to think about the rate. A mortgage is a huge commitment; you should have as much time as you need to weigh the costs.
- Pressure from the lender for you to take on a rate higher than you feel you want to pay or can afford. Any pressure from a lender should raise red flags.
- Pressure to lie on your application. No legitimate lender will ask you to lie.
- Unless you have enough savings to pay off your home in 5 to 7 years, the loan application form should say "No prepayment penalties" and "no balloon payment."
BEWARE: Offers to Loan You More Than You Can Repay
Your lender assures you not to worry, that your bad credit isn't a problem. Even though there are more regulations in place to keep lenders from making you loans you can't afford, fraudsters still skirt the rules.
Why it's wrong
The lower your credit score, the higher your interest rate is likely to be, so you will pay more money in the long term. Then, if you have trouble making payments down the road, your credit score further tanks.
Listen and read documents judiciously. Read the application form carefully to make sure the lender didn't inflate your income. No legitimate lender would suggest you pay more than you can afford.
BEWARE: Good Faith Estimate Not Honored
Your lender is required by law to estimate your loan costs at a given mortgage interest rate. This is called a "Good Faith Estimate" (GFE). If your loan officer ignores your GFE even though nothing's changed, or refuses to honor it, turn down the deal.
Why it's wrong
Mortgage lenders are legally required to honor a Good Faith Estimate within 3 business days of application unless the loan has been denied.
If your lender mortgage estimate suddenly changes, your lender may be acting unscrupulously, hoping you won't ask questions, or assuming you don't know the rules.
BEWARE: Not Being Told the Risks of an Adjustable Rate Mortgage
(aka Variable Rate Mortgage)
Interest rates on a mortgage can be fixed, meaning they don't change over time, or adjustable, meaning they start out low and adjust over time since they are tied to changes in an index linked to the credit markets. These loans transfer some of the lender's risk to the borrower, since changes in the credit market could cause your payment to double or even triple. A predatory lender might try to focus only on the up front, "lower" end of your mortgage and skip over how that rate could increase. This can lead to surprise increases in payments, defaulting on a payment that you can't afford, and foreclosure
Why it's wrong
A lender who does not make clear what you are paying now and may have to pay in the future puts you at risk.
Always read your paperwork thoroughly. You have a legal right to know exactly how much you might have to pay in the future. If the lender is vague or refuses to disclose this, walk away.
Beware: Variable rate mortgages are on the rebound, and for many people they're a surefire way to lose a home. The most common problem is being told that you can always refinance if the rate goes up. Problem: If your house is underwater or you're in economic straits, you may not be able to refinance and you'll lose your home when the payments double or triple.
When You're Looking for a Reverse Mortgage
A reverse mortgage is a unique type of home loan that lets seniors over 62 convert a portion of their equity into cash, which can be paid to you on a monthly basis. However, these loans are especially subject to fraud.
BEWARE: Come-ons from a Predatory Advertiser
Predatory advertisers may undersell homeowners on how much money they can receive from a reverse mortgage and pocket the difference, or use high pressure sales tactics to talk them into bad reverse mortgage terms. Homeowners should be wary of unsolicited advertisements from reverse mortgage companies or unfamiliar institutions.
Why it's wrong
Older adults and the elderly are a high risk group for predatory lending scams, often because they don't have family to advocate for them, don't know who to call for help, and may be more inclined to accept a fraudulent deal.
Advertisers often suggest that a reverse mortgage is "free money" and that if you take one out you will "never" lose your home - both false. Remember, homeowners with reverse mortgages still pay real estate taxes. There are also conditions under which homes with reverse mortgages can go into foreclosure. Before signing one, consult a HUD-certified reverse mortgage counselor.
When You're Looking for Loan Modification
When you're looking for a modification to your loan agreement, chances are your finances have been compromised, or you may even be facing foreclosure. You need to work with a fair lender to get a reduced or different type of interest rate, an extension on the length of the terms of the loan or change the type of loan.
BEWARE: Fraudulent Modification
Scammers will make false promises to "Stop foreclosure now!" or "Guarantee loan modification" before individually assessing your financial situation. They may ask for personal information up front, and/or pretend to represent reputable government or financial institutions. This takes advantage of distressed homeowners, placating the homeowner before ripping them off. These scams are all too common, and homeowners should be careful.
Why it's wrong
These companies take money up front offering to broker a loan modification for a homeowner but do nothing. Banks and non-profits will do this for free. No legitimate financial or government institution will make promises up front before looking at your finances, either..
- Company asks for a fee in advance to work with your lender
- Company says they can stop a foreclosure or guarantee a loan modification
- Company advises you to stop paying your mortgage
- Company asks you to release personal financial information over the phone
Here's an example of conversation between a homeowner and a fraudulent lender:
Wow, great, what do I need to do?
You'll just fill out a simple application with your bank account and routing number, and basic information.
That's all the information you need?
Yep! Then we can expedite that with a processing fee, which you can send as a moneygram.
What about my credit score? We were late on some payments so it may have gone down.
Not a problem. We can make it work.
NeighborWorks America has a page with information (in English and in Spanish) on how to recognize and how to report a mortgage scam.
When You're Trying to Refinance Your Home
Scammers often try to take advantage of people refinancing because they know there's a chance you're facing financial difficulty or that you may be open to changing lenders in order to get a better rate.
BEWARE: The Bait-and-Switch Scam
A company advertises a low interest rate but, at the last minute, jacks up the interest rate.
Why it's wrong
This is false advertising. Never sign anything until you are absolutely sure of the reliability of the institution, and the terms of the refinance.
Many of these scams come by phone or email. They often make grandiose promises to get the cheapest rates or to give homeowners large amounts of cash back at closing. Again, the "too good to be true" adage should apply.
BEWARE: The Sign Over Scam
As part of an ostensible refinance, you be asked to sign over the deed to your home "temporarily" to a company that says it will act as middle man -they say they'll pay the previous lender, but they don't. This can lead to eviction and a scammer owning your home.
Why it's wrong
This is one of the most predatory scams out there. You should never sign over the deed to your home unless you are no longer responsible for that loan.
Look for signs of predatory practices such as pressure to sign, grandiose financial promises, and/or unwillingness to disclose any information you feel is relevant. Remember that you have the legal backing of the Federal Truth in Lending Act, which guarantees borrowers who refinance on their primary residence a three day grace period to back out after closing.
When You're at Risk of Foreclosure
Homeowners facing foreclosure are especially vulnerable to fraudulent schemes. These will often take the form of "rescue" or other forms of false help that can lead to dire circumstances.
BEWARE: The Phantom Help Scam
The homeowner receives an offer of third party help, to negotiate between homeowner and lender, by phone or email, for a fee. Homeowner is often told not to contact their current loan servicer, and to offer up personal financial information.
Why it's wrong
Most of these scams seek to drain equity or steal the house outright from under the homeowner.
Be suspicious when someone contacts you claiming to be a "Foreclosure Prevention Specialist" or offers "foreclosure consulting." Several things could happen here - the fraudster could file for bankruptcy in your name with information you gave them (and not tell you), or convince you to file for bankruptcy, in which case the foreclosure will be arrested because of "automatic stay." Collection calls stop. Homeowners believe everything is fine, and that they can stay in their homes. The scammer may tell the homeowner to ignore a letter from the court (asking for their appearance), after the court date passes with a no-show the foreclosure goes forward and the house is lost. Note that the scammer is usually taking money for this so-called "counseling," whereas the government offers foreclosure counseling for free.
BEWARE: The False "Bailout" Scam
This is where a person poses as a buyer and offers to rescue a homeowner facing foreclosure by buying out the loan. The con artist may promise to buy the loan outright or pay the homeowner a sum after the property is sold. He may ask homeowner to sign the deed and either move out so he can rent the property, or he will offer to let the homeowner stay as a renter in the property. The scammer, however, has no intention of actually paying homeowner.
Why it's wrong
Homeowners can lose their home, and have no money to show for it. Worse, the homeowner may still be liable for the unpaid mortgage debt, even after signing over the deed.
Scammers will often ask for the deed to the house and other personal financial information up front. They may tell homeowner this is their "only" or "best" chance at saving their credit and getting out from an underwater mortgage.
You don't have to be in desperate straits to be targeted by a fraudster. Many scams come by phone or email saying your loan servicer has changed. Always do your research. If your loan servicer has really changed, you'll get a goodbye letter from one and a hello letter from the other. If you don't, and start paying the new "lender," you may receive a notice that your loan from the real (unchanged) servicer is in default. You risk losing your house, and the con artists run away with your money. To double check that your servicer really has changed, call your original servicer. Don't go by the phone number listed or provided by the new lender, because it could just be the fraudster's number.
How to Avoid Scams and Predatory Lending
Spotting the red flags of scams is not that hard once you know what to be aware of. Here are some important tips:
A legitimate lender will not offer you anything radically above and beyond what other competitors can offer you. Get other bids. Call a HUD-licensed housing counselor if in doubt.
Avoid Balloon Payments and Prepayment Penalties
Anytime you are getting a "great deal up front, be sure to check for early prepayment penalties or balloon payments that kick in later.
Always Suspect an Unsolicited Loan Offer
Scammers most often seek you out, rather than the other way around. If you are in a vulnerable target group, be alert, ask questions, confirm certificates and licensure and get second and third opinions.
Don't Give Money Upfront to a Non-Lender
One of the biggest red flags of a scam is when a person or company asks you for an upfront fee to negotiate or process a loan or other lending product.
Don't Be Fooled by Faux Names Playing Up Religious or Ethnic Identifies.
Just because a person or organizations says they share your same religious affiliation or ethnic identity does not make them reputable. Double check sources and other red flags.
If You're Promised the World—a.k.a. Offered a "Guarantee"—Run
Whether it's for instant credit repair or a loan modification or saving your home from foreclosure, it's against the law to guarantee a borrower that they'll get a loan modification from their lender. Legitimate mortgage relief companies have to state that they can't guarantee an agreement from your lender. This is called the FTC's "MARS" Rule.
Never Work with Anyone Who Recommends You Not to Consult Your Lawyer, Credit Housing Counselor, or Lender
A sure fire sign of a scammer is when they don't want you to consult with the people whose job it is to help you make smart financial decisions. In fact, whenever possible, only work with people you know.
Sign Only Documents That Are Complete, that You've Read and Understand and That Are Authored By Credible and Identifiable Parties
Always seek the help of a HUD- or certified loan counselor in your state.
Read the Fine Print
Don't fill out documents that have blank spaces or that you don't understand completely.
Don't Be Bullied
Any legitimate person or company will not pressure you into settling on a deal or signing anything in a hurry.
Verify All Parties (Lenders, Lawyers, Mortgage Loan Assistance Companies)
Scammers may use an icon of HUD or state agency, claim to be lawyers, provide phone numbers, create legitimate-sounding acronyms with words like "Federal," or even make a website with an icon on it that looks legitimate - don't trust this. Don't trust addresses that are P.O. boxes or residential. If someone claims to be a counselor, look them up on the database of HUD-approved state agencies.
Who Do Mortgage Scammers Target?
Distressed Homeowners and Neighborhoods
Public records state foreclosure. Target people and neighborhoods haunted by foreclosures
People with Emergency Needs
Often people who need money quickly, such as for medical bills or other emergencies.
First-time homebuyers may be less knowledgeable about what constitutes fair practices and may be more eager to close the deal.
People With Credit Problems, and Those Who Have Recently Lost Jobs but Own a Home
Predatory lenders may try to convince vulnerable people to refinance or take out additional loans for "instant equity."
Only seniors, adults 62 or older, are allowed to take out reverse mortgages. Widows in particular can be targets for reverse mortgage fraud. The FBI has its own tip line for elder fraud.
English Language-Limited Neighborhoods, Individuals
Scammers look to infiltrate vulnerable communities - one vulnerability is not being fluent in English. A bust in Illinois awhile back targeted 54 mostly Hispanic homeowners and cheated them out of $220,000 collectively.
Individuals aren't the only ones targeted. Churches looking to refinance mortgages or buy their properties can be, too. Scammers might pose as "consultants" offering to broker deals between churches and banks. Infiltrating a church is a way of gaining trust in a community.
What Do Scammers Look Like?
Unfortunately, scammers can masquerade as professionals because they know how to blend in. However, they often ask for payment up front, pressure you to make decisions, tell you that they can easily solve problems like bad credit and foreclosure and offer you "magic" bailouts and solutions that sound too good to be true.
Resources for Victims of Mortgage Scam and Fraud
If you have any uncertainty about a loan product, take advantage of the following resources:
- Find your local resources: the Department of Housing and Urban Development (HUD) state portal allows users to choose on their home state.
- Talk to a HUD-Approved Housing Counselor: use this portal to find the nearest HUD-Approved counseling agency near your home. You can search more specifically for counselors who handle reverse mortgages and foreclosure.
- File a housing discrimination complaint with the HUD. The Fair Housing Act protects anyone discriminated against based on race, sex, gender, religion, familial status, national origin or disability. File here and a fair housing specialist will review your case.
- Use the Consumer Finance Protection Bureau's online portal to file a mortgage-related complaint.
Q&A with Expert
Who are victimized populations you commonly see?
Yana L. Miles:
Lower wealth households, older Americans, military service members, communities of color—primarily Black and Hispanic. People who have fewer resources to get access to info that allows them to see when something's not right or don't know about housing counseling.
When are reverse mortgages a good idea?
Yana L. Miles:
I would proceed with caution on reverse mortgages. It's an area ripe for fraud. I don't think anyone with heirs should do it. A scammer can gloss over a lot of the fine print.
What are the most dangerous scams for consumers to be aware of?
Yana L. Miles:
In 2016 we're not looking at things in the same way as 2004, especially with the passage of the Dodd-Frank Act. Lenders are incentivized to engage in clean underwriting, full disclosure. However, we still have people in the shadows. [Be suspicious of] any lender that attempts to make it easier on the borrower by taking shortcuts in getting proper documentation.
What are action steps homeowners can take to avoid being the victim of a scam?
Yana L. Miles:
Get housing counseling through HUD-approved housing counseling agencies. Get help or make a complaint at the Consumer Financial Protection Bureau (CFPB).
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