Common Scams and Predatory Lending Tactics
Common Mortgage Scams & How to Avoid Them
Updated: November 27, 2022
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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
What happens
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.
BEWARE: Offers to Loan You More Than You Can Repay
What happens
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.
BEWARE: Good Faith Estimate Not Honored
What happens
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.
BEWARE: Not Being Told the Risks of an Adjustable Rate Mortgage
(aka Variable Rate Mortgage)
What happens
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.
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
What happens
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.
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
What happens
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..
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.
Thank you.
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
What happens
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.
BEWARE: The Sign Over Scam
What happens
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.
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
What happens
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.
BEWARE: The False "Bailout" Scam
What happens
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.
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:
Who Do Mortgage Scammers Target?
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.
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