Common Mortgage Scams And How To Avoid Mortgage Fraud

Author:

Nov 25, 2024

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7-minute read

A young man sitting on his home couch looking at something on his laptop.

The effects of mortgage scams impact every aspect of the home buying process.

Since the 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, you should be wary of predatory practices in order to avoid mortgage fraud and 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 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.

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Signs Of Mortgage Fraud

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.

The following signs may indicate mortgage fraud.

1. “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.

2. 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 (HUD). 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.

3. Mortgage payment scams

If you’ve ever wondered how much of your income should go to your mortgage, a good rule of thumb is to understand the 28% rule. This means that no more than 28% of your gross monthly income should go toward your monthly mortgage payment.

The higher your debt-to-income ratio (DTI), the riskier you are for a mortgage lender. If your lender is offering a loan that is larger than 28% of your income, be wary.

4. Homes that are 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.

5. Penalties for prepayment

A prepayment penalty is charged for