As a consumer in the real estate industry, it is important to understand and be aware of what a mortgage scam is and the different types of scams to protect yourself from falling victim to one of them.
A mortgage scam is when someone intentionally misrepresents information for their own profit or benefit. There are dozens of different mortgage scams which can be perpetrated by mortgage lenders, real estate agents, investors, and others.
Mortgage scams can happen to almost anyone. In 2021, consumers reported a total of 11,578 internet real estate scams, costing victims over $350 million.
The best way to avoid succumbing to a mortgage scam is to educate yourself and stay vigilant. Since mortgage scams can come in many forms, we’ll explain some of the most common ones and how fraudsters may try to trick you into falling for them.
Bait and Switch
A bait-and-switch mortgage scam entails a lender falsely advertising a low-interest rate to attract borrowers (the bait), then sharing a higher rate or additional fees when a borrower expresses interest or submits an application (the switch).
A lender using a bait-and-switch may claim you don’t qualify for the advertised rate or say it’s no longer available. Other red flags include evasive lenders who refuse to show the loan terms in writing, avoid answering questions or change the terms at the last minute.
Borrowers may fall for a bait-and-switch scheme because they think they won’t qualify for a better rate or because they feel invested in the loan after spending time and effort doing all the paperwork.
Foreclosure Scams
Foreclosure scams attempt to take advantage of homeowners by pretending to help them avoid a foreclosure situation.
A foreclosure scam can be as simple as someone claiming to keep your home out of foreclosure for a fee or posing as your lender and asking for money to prevent foreclosure. More elaborate foreclosure scams may involve “temporarily” transferring the deed and ownership rights, with the option to rent the home or buy it back later.
Unfortunately, once you sign the deed and transfer ownership to someone else, you surrender all your rights to the home.
Telltale signs of foreclosure scams may include someone posing as a foreclosure or mortgage consultant or anyone promising to help you avoid foreclosure in exchange for money or the deed to your house.
If you’re worried about foreclosure, contact your lender directly or speak to a U.S. Department of Housing and Urban Development (HUD) counselor to discuss your options. HUD counselors never charge a fee.
Loan Flipping
Loan flipping (aka loan churning) happens when lenders convince borrowers to continually refinance their mortgages. Each time a borrower refinances, the lender profits from the fees they charge. While there are many legitimate reasons to refinance, which can benefit the borrower, loan flipping refers to the unethical practice of pushing borrowers to refinance when it isn’t advantageous.
With loan flipping, predatory lenders use deceptive tactics to persuade borrowers to refinance, like pushing them toward a cash-out refinance or claiming there’s a new or better loan product.
Before you refinance, carefully review the new loan terms. Pay particular attention to the mortgage closing costs and fees, the interest rate, your new monthly payment amount, and the length of the loan.
If a lender pushes you to take on a higher interest rate or extend the loan term, it may be a sign they’re attempting to churn the loan.
Reverse Mortgage Scams
Reverse mortgage scams tend to target older adults, with scammers profiting from the reverse mortgage payout. This type of scam can dupe victims into thinking a reverse mortgage will relieve them of a financial burden or persuade them to use the money to buy another property.
Fraudsters in reverse mortgage scams may help homeowners apply for a reverse mortgage only to skim from the proceeds or convince homeowners to use the money they receive for a specific purpose.
For example, unscrupulous real estate agents or lenders might push someone to use a reverse mortgage to buy a fixer-upper to flip. The scammer tells the homeowner they can profit without putting any money down. Sadly, the lender and real estate agent are conspiring to get a commission and don’t have the homeowner’s best interests in mind.
Another example of a reverse mortgage scam can come from contractors, specifically those who advise homeowners to use a reverse mortgage to pay for repairs or improvements.
Red flags for reverse mortgage scams include unsolicited offers to help you apply for one, asking for upfront payments, or pushing you to use the proceeds to pay for a house or home renovations.
Though they might get a bad rap, there are plenty of times when a reverse mortgage can be the right financial decision.
Equity Stripping
Equity stripping (aka equity skimming) scams usually impact homeowners struggling to make their mortgage payments. An investor will offer to buy the home for the remaining amount on the mortgage to help the homeowner avoid foreclosure. The investor might tell the homeowner they can repurchase the home later and continue living there if they pay rent.
The homeowner agrees and signs the deed over to the investor, who now has the homeowner’s equity in the property. With the ownership rights to the home, the investor can then raise the rent or evict the previous homeowner, stripping them of the equity they built in the home.
Homeowners who fall for equity stripping schemes usually think the investor is buying their home for a fair price or that they’ll get to keep their home.
You might be dealing with a con artist trying to steal your equity if they offer to pay off your mortgage balance or ask you to temporarily transfer ownership of your home.
If you find yourself among these higher-risk groups, it's crucial to remain vigilant when shopping for a mortgage. Always check to ensure you're working with a licensed, reputable lender by looking at their website, checking their credentials, and reading online reviews.
How to Avoid Mortgage Scams
Avoid unsolicited offers: If you receive a solicitation from someone offering to help you solve a problem, it could be a scam. Unless you reach out and ask, it’s best to avoid any offers to provide you with mortgage relief, a way out of foreclosure, or other unsolicited pitches.
Verify professional credentials: Do your research and make sure the person you’re speaking to is qualified and licensed. You can verify mortgage professionals on the Nationwide Multistate Licensing System (NMLS) website. Real estate professionals can be verified online by visiting the state real estate commission’s website.
Shop multiple mortgage lenders: Mortgage lenders should never discourage you from exploring your options. Before agreeing to a mortgage, shop around and get quotes from multiple lenders. To ensure the mortgage is legit, use the NMLS search to verify your mortgage broker.
How to Report a Mortgage Scam
Mortgage scammers can target anyone and strike at any time. Even those who are well-prepared can fall victim to mortgage fraud, which is why you should act swiftly if you or someone you know suspects mortgage fraud is occurring.
You can report a mortgage scam by:
Contacting your mortgage lender
Reporting suspected fraud to local law enforcement, the FBI, HUD, and the FTC
Notifying your state's attorney general or department of consumer affairs
Consulting a HUD-certified counselor
Conclusion
Mortgage scams are scary, but you can have peace of mind knowing that you're the first and strongest line of defense against them. Recognizing the red flags is the first step to protecting yourself. Always trust your instincts and avoid anyone who makes unsolicited offers, discourages you from speaking to your lender, or gets too pushy.