Common Mortgage Scams In 2023 And How To Avoid Them

The effects of mortgage scams impact every aspect of the home buying process. In 2021, the Federal Bureau of Investigation’s Internet Crime Complaint Center reported  11,578 victims of rental or real estate fraud, resulting in a total loss of $350,328,166.¹

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, you should be wary of predatory practices to avoid mortgage scams.

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.²

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.

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.

Mortgage Payment Scams

A mortgage payment should remain under 28% of your monthly income.³ The higher your debt-to-income ratio (DTI), 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.

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 Scams
• 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.

Mortgage wire transfer scammers may attempt to hack legitimate email addresses or send the buyer phishing emails posing as someone involved in the transaction. They’ll monitor pending sales, and as the closing date nears, they will send fraudulent instructions to wire the closing funds.

• What it is: Mortgage wire fraud is the process of scammers persuading home buyers to route the closing cost payment to an illegitimate bank account, oftentimes without the possibility of reversal.

• Expert advice: Wiring instructions should be voice verified. Before sending payment, authenticate the receiving account with your bank. Always double-check that incoming emails have legitimate addresses, and watch out for grammatical errors and excessive urgency.

Foreclosure Scams

Following the mortgage crisis in the 2000s, homeowners in financial distress became a common target for mortgage scammers. These predatory lending schemes use a variety of methods, like equity skimming, loan modification, and rescue and relief schemes to take advantage of vulnerable homeowners.

In short, these tactics offer to pay the mortgage or save the home of a homeowner in financial distress. Let’s explore a few common types of foreclosure scams.

Equity stripping: Equity skimming, or equity stripping, takes place when a homeowner defaults on their loan, and a predatory investor offers to purchase their property to avoid foreclosure. The investor then gains the deed of the home and leases the property to a third party or the existing owner. The perpetrator then pockets the rental income (which is typically inflated), refinances the mortgage to strip the equity and flips the home while the abandoned homeowner is still indebted to mortgage obligations.

Loan modification and foreclosure relief scams: With a loan modification scheme, scammers misrepresent themselves as government officials or attorneys and offer to negotiate the terms of a mortgage to avoid foreclosure. In exchange for the agreed service, they charge high fees that are due upfront. Generally, they either negotiate unfavorable terms which result in eventual foreclosure, or fail to negotiate new terms at all.

• What it is: Foreclosure scams involve tactics that exploit financially insecure homeowners to either pocket the equity or take ownership of a home.

• Expert advice: Prior to working with a third party, you should seek help directly with your lender or service provider. Always verify the credentials of mortgage relief service providers with the U.S. Department of Housing and Urban Development (HUD) prior to opting into their services.

Reverse Mortgage Scams

Reverse mortgage fraud is a scheme that takes advantage of home equity conversion mortgages (HECM), which are insured by the Federal Housing Administration.

HECM is intended for senior homeowners, ages 62 and older, who own their primary residence. The program offers seniors their home equity in a single payment.

Scammers take advantage of the program by recruiting seniors and applying for the loan on their behalf based on an inflated appraisal. While the homeowner continues to pay property taxes and insurance, they’re offered a portion of the payment while the scammer skims the remainder.

Because the HECM program doesn’t require repayment until the homeowner no longer lives in the property, the original lender often doesn’t recognize the scam until the homeowner passes away or sells their home, at which time the entire loan plus interest accrued is due.

• What it is: Reverse mortgage fraud takes advantage of the HECM program which offers seniors a lump sum for home equity which scammers will skim or steal.

• Expert advice: Be wary of programs that imply reverse mortgages are a government benefit instead of a loan with a repayment structure.

Bait-And-Switch Scam

The bait-and-switch tactic entices buyers with impressive terms and mortgage rates. Once the buyer signs on, those terms are then flipped or they’re told they no longer qualify for the lower rate. This leaves home buyers stuck with fees, high rates or unattractive loan terms.

Because rate changes happen often in legitimate settings and it’s possible for additional fees from Fannie Mae and Freddie Mac to be added to your loan after the estimate, these scams can be difficult to prove.

Specific types of mortgages, like negative amortization home loans and balloon loans, may have the same classification, as buyers are lured into these loans with impressive or nonexistent interest rates that become unaffordable after the set introductory period.

• What it is: Bait-and-switch scams tempt buyers with deals that offer low mortgage rates or impressive terms, then flip the offering to a deal with much higher rates or worse terms.

• Expert advice: Ask your mortgage lender to lock in your rate with a breakdown of fees. With your rate lock confirmation you’ll also get a Loan Estimate to compare rates across other lenders.

Loan Flipping

Loan flipping, also known as loan churning, is the process of continually refinancing a borrower’s mortgage in attempts to collect fees for financial gain. This tactic has few to no benefits to the borrower, and can add transaction fees and closing costs that result in a longer term and additional debt.

Loan flipping is different from illegal property flipping where a borrower purchases a home at a higher appraised value than it’s worth and sells it quickly after purchase.

• What it is: Loan flipping is the process of continually refinancing a borrower’s mortgage, without benefits to the homeowner, in order to collect fees while their term is extended.

• Expert advice: Look at the overall cost of your refinanced loan including the interest rate, closing costs and fees across the new loan term, which may be extended.

Fake Real Estate Agent

Real estate broker fraud typically occurs when an agent misrepresents themselves or misinforms a buyer. In some cases, a fake real estate agent may falsify credentials with a fake license, background or work history. Alternatively, a real estate agent may not follow full disclosure requirements about a property’s age, defects or foreclosure. These fraudulent agents may also try to rent out a home that’s being foreclosed on or for sale.

The fundamental issue with a fake real estate agent or broker fraud is misrepresenting factors of a sale to a buyer.

• What it is: A fake real estate agent may misinform a buyer about a property or misrepresent themselves with a fake license or work history.

• Expert advice: Check with your state’s department of real estate or the real estate commission to verify your agent’s license number before conducting business with them.

Mortgage fraud tactics adapt as the real estate industry and authorities work to identify and prevent existing practices. To avoid mortgage scams, stay observant throughout your mortgage process, and question what you don’t understand.

• Understand the terms: Read through documents, make sure they’re complete and get clarification on mortgage terms and anything you don’t understand before signing.

• Speak to licensed professionals: Verify the licenses of all the people you work with including lenders, lawyers and mortgage loan assistance companies on the database of HUD-approved state agencies.

• Don’t accept unsolicited offers: Mortgage scam perpetrators often seek out vulnerable targets. You should be suspicious of unsolicited loan offers, and maintain contact with your Home Loan Expert or mortgage service provider.

• Avoid upfront fees: Don’t pay upfront fees for lending products or services to non-lenders.

• Suspect guarantees: It’s illegal to guarantee loan modifications – legitimate companies will disclose they can’t guarantee a change to the agreement.

If you’ve fallen victim to mortgage fraud, reporting the incident helps prevent further problems and helps authorities prosecute the offender and close ongoing investigations. To report a mortgage scam, follow the below steps:

1. Contact your Home Loan Expert or mortgage service provider.
2. Talk to an HUD-approved housing counselor.
3. Report the fraud to relevant authorities – FBI, U.S. Attorney’s Office, state, Federal Trade Commission or the Consumer Financial Protection Bureau.

Rocket Mortgage^® is an online mortgage experience with award-winning customer service and expert advice. Here’s a few questions we asked Bill Banfield, Rocket Mortgage Executive Vice President of Capital Markets, about mortgage scams.

Can Someone Really Steal Your Home Title?

“While home title theft is something that affects many Americans every year, it is a misnomer,” Banfield says. “The criminal first steals a homeowner’s identity, then they can forge a new home title to make it look like they are the actual owner.”

He continues, “If you suspect this may have happened to you, the immediate first step you should take is contacting law enforcement. Then, you should call your lender and title company, which will help ensure the criminal is not able to leverage the forged deed – potentially saving you from losing lots of money.”

What's The Best Way To Avoid Scams When Buying A Home?

“The best ways to protect yourself from scams when buying a home are simple tactics, but vitally important,” says Banfield.

“Be diligent, do your research, consult with your licensed mortgage banker and be skeptical of deals that seem ‘too good to be true.’ If you are worried you might be subject to a scam, immediately call a reputable lender to determine the truth.”

Whether you’re a victim of mortgage scams or suspect them, the resources below are federally and state funded to help navigate fraud and create a safer, more informed industry.

• Consumer Financial Protection Bureau Complaint Form
• Federal Trade Commission (FTC) Complaint Assistant
• Department of Housing and Urban Development State Resources
• Department of Housing and Urban Development Approved Housing Counselors
• Fannie Mae Mortgage Fraud Investigations (MFI) Suspected Mortgage Fraud Report
• Department of Financial Protection and Innovation (DFPI)

Mortgage scams adjust based on economic changes and adaptations to lending practices, making them reactive and persuasive. Be vigilant about the credentials of the people you work with when you’re purchasing a home, refinancing or if you’re in a financially insecure situation. For more information on mortgages and other related topics, check out Rocket Mortgage Learn Center.

Sources: 

¹ Internet Crime Report

² Mortgage Fraud Trends Reports

³ What Percent Of Your Income Should Go Toward A Mortgage Payment