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How To Spot & Avoid Mortgage Loan Scams

Buying a home should be an exciting milestone, but the mortgage process can be confusing and stressful. Loan offers are often tricky to understand, and hidden fees are always a concern. Some salespeople use high-pressure tactics, which only intensify the stress of the situation.

These difficulties can create opportunities for scammers to take advantage of unsuspecting homebuyers. They might pressure you to make quick decisions or promise unrealistic deals.  Sadly, their schemes can ruin your finances and shatter your hopes of owning a home.

The good news is that a little knowledge can go a long way in helping you spot red flags and avoid falling victim. Read on to learn more about identifying and protecting yourself from common mortgage scams.

5 Common Types of Mortgage Loan Scams

Mortgage scammers use various tactics to steal money from unsuspecting borrowers. Here are the five most common mortgage scams you could encounter:

1. Bait-and-Switch

The bait-and-switch is a classic mortgage scam tactic. Lenders may advertise an incredibly low interest rate or exceptionally favorable terms to lure you in. However, the terms suddenly change once you’re further into the process, leaving you with a much less appealing loan offer. This tactic hinges on getting you emotionally invested before revealing the true, less desirable terms.

Protect yourself by getting all loan offers in writing upfront. Be wary of lenders who make verbal promises and resist putting the details in writing. Compare offers carefully, paying particular attention to interest rates, fees, and overall loan terms.

2. Foreclosure Rescue Scams

Those facing the threat of foreclosure are particularly vulnerable targets for scammers. These predators present themselves as saviors, offering a way to stop foreclosure and save your home. However, they often charge hefty upfront fees while providing little to no help.

Sometimes, they might even tell you to stop paying your lender, further jeopardizing your financial situation. The best way to navigate a possible foreclosure situation is to contact your lender directly to discuss your options.

3. Fake Loan Modifications

Scammers may pose as representatives of your current lender or as a loan modification company. They offer to modify your existing mortgage with better terms, often in exchange for upfront fees. After you pay, they disappear, and your loan remains unchanged.

If you’re seeking a loan modification, initiate the process directly with your lender. Be suspicious of unsolicited offers or anyone claiming to represent your lender who contacts you out of the blue. Only pay a fee to modify your loan after receiving a written agreement outlining the new terms.

4. Lease-to-Own Scams

Lease-to-own schemes sound appealing, especially for those who may not qualify for traditional mortgages. It offers a path to ownership through renting with an option to purchase later. Sadly, these contracts are often structured to make it nearly impossible to fulfill the purchase option. Scammers pocket your rent or down payment, leaving you without ownership rights when the contract inevitably fails.

Treat lease-to-own offers with extreme caution. Seek legal assistance from a real estate attorney to review the contract thoroughly before signing anything. If the terms seem overly complicated, or there are hidden penalties for missed payments or minor infractions, it’s likely a scam.

5. Equity Skimming

Equity skimming is a type of fraud where a scammer convinces a homeowner to transfer their property’s title, often through a lease-purchase agreement or other deceptive means. The scammer then rents the property, collecting income while neglecting mortgage payments. This ultimately leads to foreclosure, leaving the original homeowner without equity or a home.

Red Flags to Watch Out For

Scammers often leave clues that reveal their deceptive practices. Learn the key warning signs that indicate a mortgage situation may be fraudulent.

Too-Good-To-Be-True Offers

If a mortgage offer seems unbelievably good, your instincts are probably right. Exceptionally low interest rates, no income verification, or guaranteed approvals, regardless of your credit history, are all red flags indicative of a potential scam. Legitimate lenders must assess your financial situation to make responsible lending decisions.

High-Pressure Sales Tactics

Trustworthy lenders want you to feel informed and comfortable with your mortgage decision. Be wary of lenders who rush you to sign paperwork or discourage you from comparing offers. A reputable lender will give you the time and space to make an informed decision.

Upfront Fees

Legitimate lenders typically charge fees only after services have been rendered or upon loan closing. Large, upfront fees for vague or undefined services are a major red flag. Exceptions exist, such as appraisals, but a reputable lender will clearly explain upfront costs.

Unclear or Incomplete Paperwork

Reputable lenders prioritize transparency. Be wary of any loan documentation with blank spaces, missing information, or confusing language. Take the time to read everything carefully and ask questions if something is unclear. If the lender can’t provide clear answers, walk away.

How to Protect Yourself from Mortgage Scams

A few simple precautions can significantly reduce your risk of falling victim to mortgage fraud. Follow these essential steps to safeguard your financial well-being.

Verify Lender Credentials

Do your homework! Before engaging with any mortgage lender, verify their license and registration with your state’s regulating authority. You can often find this information online through your state’s consumer protection website or the Nationwide Multistate Licensing System (NMLS) database.

Read Online Reviews

Check online reviews for the lender on reputable platforms like the Better Business Bureau or consumer protection websites. Look for patterns in customer complaints that might indicate a history of fraudulent practices.

Shop Around and Compare Offers

Don’t settle for the first lender you encounter. Obtain loan quotes from several reputable lenders and compare them carefully. Pay attention not only to interest rates but also to fees and closing costs, as these can add significantly to the overall expense of the loan.

Don’t Pay Upfront Fees

Be extremely wary of lenders demanding hefty upfront fees before they’ve provided any actual services. While some fees, like those for appraisals, may be legitimate, a reputable lender will explain why they are necessary and usually charge them at closing.

Consult with Experts

If something feels off or you have doubts, seek the advice of a real estate attorney. These professionals can offer unbiased guidance and help you understand your options.

Trust Your Gut

Ultimately, your instincts are important. If a situation feels too good to be true or a lender’s behavior raises red flags, walk away. It’s better to be cautious than to become a scam victim.

What To Do If You Suspect a Scam

If you believe you’ve encountered a mortgage scam, take swift action. Report the incident to the relevant authorities to help prevent others from being victimized and potentially recover losses.

Stop Communication with the Scammer

Immediately cease all communication with the suspected scammer. Do not provide any further personal information or engage with their requests for money.

Report the Scam

Immediately report the scam to help prevent others from falling victim. Contact the following:

Seek Professional Help

If you’ve fallen victim to a scam, explore your recovery and damage mitigation options. Here are resources to consider:

  • Your Lender: Contact your lender directly to discuss the situation. They might have programs or options to assist you.
  • An Attorney Specializing in Real Estate and/or Fraud: A legal professional can advise you on your rights and potential courses of action.

Protect Your Homeownership Dreams

Mortgage scams prey on people’s hopes and dreams of homeownership. By being informed, vigilant, and proactive, you significantly decrease your risk of becoming a victim. Share this information to help protect others in your community, and remember, empowered borrowers can outsmart scammers.

At Freedom Credit Union, we’re committed to helping you achieve your dream of homeownership. If you feel you’ve been a victim of fraud, contact our Loss Prevention Department at (215-612-5964) and follow the prompts to get to loan servicing to discuss your situation and explore potential solutions.