Every industry has its shining stars and bad apples. The mortgage industry is no exception. For most consumers, a mortgage will be the single largest purchase they make in their lifetime. This makes picking the right mortgage lender even more important. It's also important to know how to spot a mortgage scam so you can avoid becoming a victim.
Common Types of Mortgage Scams
Mortgage scams can take different forms and target different types of consumers. For example, loan modification scams are aimed at existing homeowners who may be seeking debt relief in the form of a loan modification. Scammers take advantage of this by promising homeowners they can offer them more favorable mortgage terms, only to take their money and run.
Another type of scam involves borrowers who are preparing to close on a home loan. This type of scam typically involves phishing schemes, in which a scammer attempts to steal your banking information. If they're successful, they can then reroute your down payment or closing cost wire transfers into their own accounts.
Reverse mortgages can also be an opportunity for scammers to try and steal money from unsuspecting consumers. A reverse mortgage allows a homeowner to receive payments against the equity value in their home. Scammers can use different means but the end goal is the same: to steal the homeowners' equity.
Still other mortgage scams involve loan flipping or individuals who fraudulently represent themselves as real estate agents. Loan flipping or churning is a practice in which the same loan is repeatedly refinanced in order to generate more fees for the lender. Real estate agent fraud may involve an attempt to persuade a buyer to purchase a home using falsified documents or by withholding key information about the property in order to collect a commission.
The federal government urges people who believe they've encountered a mortgage scam to report it to the Federal Bureau of Investigation.
How to Spot a Mortgage Scam
Mortgage scammers can offer some dead giveaways that might suggest they're not entirely legitimate. In other cases, however, spotting a mortgage scam may be more difficult. As you embark on the mortgage process, here are some of the most common red flags that might suggest a scam is at work.
1. Not taking into account your ability to pay
Your mortgage payment should be no more than 28% of your gross monthly income. It's not the mortgage company's job to create your household budget, but it should ask you many questions regarding your finances. If it doesn't, then it is probably not a company you want handling your mortgage.
2. Not getting the option to purchase points
A "point" or "discount point" is like prepaying your mortgage interest. Borrowers purchase points to lower the amount of interest they will pay on the loan. Your lender should give you the option to lower your interest rate through the purchase of points.
3. Excessive loan costs
Many of the loan costs are fixed no matter how much you borrow. For a larger mortgage, expect the closing costs of your mortgage to be between 2% and 5%. If you're borrowing less than $150,000, costs could exceed 5%. Some lenders will work costs into the loan in the form of a higher interest rate, but the lender should clearly disclose that to you. Always talk to multiple lenders about the total cost of the loan they are proposing. And if the costs are well beyond 5%, ask why before agreeing to the loan.
4. Prepayment penalties
For certain loans, lenders can charge a penalty if you pay off your loan early. These prepayment penalties must be disclosed to you in your loan documents. If you see it, ask for a loan with limited or no prepayment penalties.
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.
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 loans are 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.
9. No good faith estimate
Within three business days of receiving your mortgage application, a lender must provide a good faith estimate (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). 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:
- Shopping around to find a legitimate mortgage lender (you can connect with a HUD-licensed counselor to verify a lender's credentials)
- Questioning any unsolicited loan offers you might receive and who is sending them to you (asking questions can be the fastest way to root out a potential scammer)
- Not giving out money upfront to a lender without having a written explanation of what the money will cover
- Safeguarding your personal information and banking information and questioning any unsolicited requests for either one from someone claiming to be a mortgage lender
- Reading the fine print on all loan documents you receive from the time you fill out the application to the time you sit down at the closing table
- Steering clear of lenders who discourage you from talking to a certified credit counselor, attorney, or financial professional about the terms of your loan
- Questioning any offers that seem too good to be true, which can be a clear indicator that they probably aren't what they seem
- Refusing to work with lenders or real estate agents who engage in bullying practices or appear to be trying to pressure you into making a deal
- Verifying that everyone involved in the mortgage process, from your lender to the closing attorney, is certified and legitimate
Asking friends and family for referrals or recommendations could be a good way to find a reputable mortgage lender.
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:
- Contact your mortgage servicer or lender and let them know what you think has happened.
- Report suspected fraud to the FBI, U.S. Attorney's Office, Federal Trade Commission, Consumer Financial Protection Bureau, and state and local authorities.
- Talk to a HUD-certified counselor about possible solutions or remedies.
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?
Finding a legitimate loan company to work with starts with doing your research. For example, you can check the lender's credentials, their reputation with the Better Business Bureau, and consumer reviews. You can also speak to a HUD-certified loan counselor if you have doubts about a particular lender.
How Do I Protect Myself From Mortgage Scams?
The best way to protect yourself from mortgage scams is by doing your research. Comparing lenders, checking their ratings and reputation, reviewing loan documents carefully, and avoiding any situations that make you feel pressured or uncomfortable can help you avoid a mortgage loan scam.
The Bottom Line
The old saying still rings true. If it sounds too good to be true, it is. Don't fall for predatory loan tactics that may trap you in an unaffordable loan that offers terrible terms.
Use the many websites dedicated to helping you find the right mortgage. Additionally, talk to your bank or credit union and learn how to spot a predatory lender—including tactics to watch out for—and if you’re interested in a reverse mortgage, learn how you can spot red flags in this area of lending.