Common Mortgage Scams In 2021 And How To Avoid Them

The effects of mortgage scams impact every aspect of the home buying process. In 2020, the Federal Bureau of Investigation’s Internet Crime Complaint Center reported 13,638 victims of rental or real estate fraud, resulting in a total loss of $213,196,082.1

Because money lost from mortgage scams can be high value and difficult to recoup, predatory lenders are constantly evolving tactics to evade authorities and trap borrowers. Whether you’re in an undesirable financial situation, buying a home or refinancing, be wary of predatory practices to avoid mortgage scams.

What Is Mortgage Fraud?
Any misrepresentation of information on a home loan application can be considered mortgage fraud, classified under Financial Institution Fraud (FIF). Mortgage fraud is typically carried out for profit or for housing.

Mortgage scams for profit: Those who attempt mortgage fraud for financial gain are typically lenders, brokers and other entities that make false claims in order to obtain monetary compensation or equity from lenders and homeowners.
Mortgage scams for housing: Mortgage scams for housing are generally perpetrated by borrowers in order to gain ownership or change the appraised value of a home. According to the mortgage fraud index, one in 200 refinance applicants and one in 164 mortgage applicants have indications of fraud.

How To Spot Mortgage Scams
In cases of mortgage fraud for profit, scammers most commonly promise victims to save their homes from foreclosure with term modifications and debt management, or to entice buyers with free services and reduced interest rates. Scammers prey on vulnerable homeowners and prospective homeowners who lack education or financial security.

High risk target: 1) homeowners facing foreclosure, 2) homeowners afflicted with job loss 3) prospective owners with credit problems 4) homeowners who qualify for reverse mortgages 5) first-time home buyers 6) homeowners facing overdue bills

Predatory mortgage lenders will often use tactics to make their offer seem like a good deal. In reality, you may be getting scammed. The following signs may indicate mortgage fraud.

‘Too Good To Be True’ Interest Rates
Mortgage rates that are noticeably lower than market interest rates are typically a sign of various hidden fees or even a bait-and-switch tactic. Predatory lenders may try to tell you that you no longer qualify for the advertised rate or tack on additional fees after locking in the original rate if they think they can get away with it.

Your Loan Estimate Isn’t Honored
Your Loan Estimate gives basic loan information in a standardized format from the U.S. Department of Housing and Urban Development. It includes itemized costs of a loan, including fees, and is sent within 3 business days of a mortgage application. Lenders aren’t allowed to charge fees outside of the credit report fee prior to accepting the terms.

Under the Real Estate Settlement Procedures Act (RESPA), mortgage lenders are required to honor the Loan Estimate within the relative tolerance level. If these estimates aren’t honored outside of changed circumstances, be wary of predatory lending.

A Loan Larger Than You Can Repay
A mortgage payment should remain under 28% of your monthly income.3 The higher your debt-to-income ratio, the riskier you are for a mortgage lender. If your lender is recommending a type of home that requires a loan larger than 28% of your disposable income, be wary.

Homes Overvalued
Overvalued property creates risk for legitimate mortgage lenders by generating an inaccurate resale valuation or an inflated borrower income that will be difficult to pay off with existing income.

Penalties For Prepayment
A prepayment penalty is charged for paying off your mortgage too quickly or for refinancing. While prepayment penalties can offer lower overall interest rates, oftentimes, they’re hidden in the fine print of agreements. As a result, many borrowers don’t realize the stipulations of the penalties and are hit down the line with fees. Generally, these penalties are included as a way for lenders to make money on interest payments at the expense of the borrower.

Your Credit Score Doesn’t Matter
Your credit score will always affect your mortgage rate, without exception. If you’re being offered a home loan that states this score won’t affect the mortgage, be wary. These tactics are typically schemes that prey on low-income borrowers and generally come with undesirable terms.

Types Of Mortgage Frauds
The top-reported housing scheme frauds in 2020 were occupancy misrepresentation and undisclosed debt or foreclosures, according to the mortgage fraud index.3 While the data lends a glimpse into fraud within the real estate industry, oftentimes many mortgage scams go unreported as ill intent can be difficult to prove in many cases.

Common mortgage scams include:

Mortgage Wire Fraud
Foreclosure Scams
Reverse Mortgage Fraud
Bait And Switch Scam
Loan Flipping
Fake Real Estate Agent
Mortgage Wire Fraud

Mortgage wire fraud is carried out by scammers who impersonate escrow officers, real estate agents, or the lender. In this scheme, they attempt to get the prospective homeowner to wire funds into an illegitimate account for financial gain during the closing process.

These sophisticated mortgage scams often include crime organizations and untraceable offshore accounts, making the funds nearly impossible to recoup.

Wire Transfer Email Tactic Quote: "Hi Jane, you just received your closing disclosure, congrats! Your wiring instructions are attached for cash to close on 123 Louisiana St. Please process the payment and respond with proof of payment attached. You will need a form of ID for the closing appointment. Wire the funds as soon as possible with the attached wiring instructions to avoid any delays in processing."

Written by: Victoria Araj for RocketMortgage.com