Homeowners: Beware of These 5 Common Mortgage Scams
Think you know the housing market and the home financing process? You can consider yourself an expert in mortgages (Take this real estate quiz to prove it), especially if you are currently looking to finance your first home or have been a long-time homeowner. But what about the many threats to your home and financial security that currently exist? They may not even be on your radar.
While lending practices are now much more closely watched thanks to the 2007 real estate crash, it means predatory lenders and con artists need to be even more devious when it comes to deceiving borrowers. With the number of mortgage defaults and foreclosures homeowners are experiencing today, that also means there are plenty of opportunities to try.
Whether you are in financial difficulty or even a current homeowner for that matter, it helps to be aware of the most common mortgage scams so that no one can take advantage of your inexperience or your confidence.
It’s the oldest trick in the book, and now it’s been adapted for use by unscrupulous lenders. There are many variations, but the bottom line is this: A potential borrower is lured with a tempting loan offer, like a competitive interest rate or low monthly payments. This person puts a lot of effort into preparing the financing, until shortly before it is time to sign on the dotted line, the lender presents completely new and much less favorable mortgage terms.
Victims of the bait and swap scam often go through getting the most expensive mortgage because they feel they are already too invested in the loan to roll back or fear not being able to find financing for their dream home elsewhere. During this time, the lender is reaping a generous profit without having to do anything illegal.
2. Dismemberment of equity or “Leaseback Scheme”
You can’t afford to keep your house: it’s a nightmare situation that most would do just about anything to get by. Unfortunately, crooks know it and use it to their advantage. Often posing as “mortgage savers,” crooks who prey on high-value assets belonging to distressed homeowners are nothing more than crooks.
The stripping of equity begins with the promise to save a homeowner from their unaffordable mortgage. Faced with foreclosure, the landlord agrees to sign the deed to a “rescuer” in exchange for the option of continuing to live in the house as a tenant, while the new landlord pays off the delinquent mortgage. During this time, these rent payments are used to buy back the property, with interest.
Of course, if you can’t afford the mortgage, you probably can’t afford your sky-high new rents. Not to mention that the person to whom you gave your house simply pocketed the rent. Once you fall behind, you get kicked out and the scammer keeps all the equity you’ve worked years to build up in the house. In other cases, the new owner simply re-mortgages the house, collects the equity, and leaves town while it is foreclosed anyway.
The practice of home flipping has taken a negative turn in the housing industry and is often associated with mortgage scams, but home flipping has been around for decades and is completely legal (some would say unethical though. in some cases). Many have made a small fortune by “flipping” homes – buying a property cheaply (usually a foreclosure), then fixing it to sell it for thousands more. Regardless of what you think of the practice itself, it only becomes a scam when someone bluntly lies about the value of a home in order to profit from it.
Like any other mortgage scam, there are many ways to illegally flip a home. The one that affects unsuspecting homeowners the most is when an investor purchases a “top fixer” at a steep discount and then works with a real estate appraiser to artificially inflate the value of the property. A buyer is tricked into getting a loan for this inflated amount (the closing agent is often also involved in the scam), and the house is sold for a large profit in which everyone involved takes a share.
While some are in the business of flipping homes for a profit, some fraudulent lenders take the same approach for home loans. Much like leaseback programs, loan reversal involves targeting a homeowner with substantial equity, but who is currently strapped for cash, in order to drain that equity from the home.
Loan pinball machines will contact a homeowner with an offer to refinance at a lower rate and receive cash back. Whether the homeowner needs the extra cash to make improvements to their home, finance a child’s education, or pay off debt, the offer is sure to be tempting. Need $ 10,000 more? Refinance again.
Whenever the the mortgage holder refinances, however, there are closing costs and associated fees that must be paid. And of course, these scammers will charge a lot more than a legitimate lender would. As you dump all the equity in your home, they collect the fees and then disappear.
There are a number of government sponsored loan modification programs designed to reverse the current state of the housing market, so numerous, in fact, that it is nearly impossible to keep track of what they are. Mortgage crooks will rely on this fact when they create fictitious loan programs and trick distressed homeowners into “refinancing” with them.
You are way behind on mortgage payments and foreclosure becomes an imminent possibility. Like an angel, a representative of a mortgage relief program contacts you to offer help. All you need to do is provide an upfront fee to cover administrative expenses, like filing forms and making phone calls, while this person works out the new loan terms on your behalf. When foreclosure notices come to you in the mail, the representative advises you to ignore them because they handle the situation.
You don’t know that when you’ve fallen behind on your mortgage payments, your lender filed a notice of default, making your mortgage issues (and your property’s address) a public record – and you easy prey . The scammer does nothing to improve your situation while raising thousands of dollars from you, and once your house is lost to the bank, your ghost assistant is gone.
While mortgage scams are rife, you can protect yourself if you are aware of red flags and remain wary of any deal that sounds too good to be true.
First, one of the telltale signs of a loan modification or mortgage scam is the demand for upfront fees. No legitimate program requires you to pay a fee before undergoing a loan modification and receiving help. Additionally, those seeking door-to-door mortgage relief, through leaflets or on telephone poles, are likely to be involved in fraudulent services. And if you are offered assistance that requires you to make payments to someone other than your lender or give up ownership of your property, beware.
The best thing to do when you are in financial difficulty is to contact your lender directly and seek help. sometimes they’d rather have a smaller loss on a home by reducing your mortgage than a big loss from a short sale or foreclosure. And remember, if you can’t make a deal with your lender, selling your home for a fraction of its original value is always a better option than losing it – and even more – to a scammer.