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Whenever you enter into a big financial transaction, you have to be cautious and make sure that the people you're dealing with are above board. Unfortunately, there are some shady people out there who are eager to swoop in and take advantage of consumers.
If you're choosing a home loan or considering whether to refinance, there's a lot of money at stake, so it's especially important to be on your guard against mortgage scams. Here, we'll cover a few major red flags that often indicate fraud. We'll also go over some common mortgage scams so you know what to watch out for.
What is a mortgage or refinance scam?
Mortgage and refinance scams are types of fraud. The scammers who commit these crimes pretend to offer legitimate mortgage products or related services like housing counseling, but they're actually tricking consumers into giving up money, personal information, equity, or the title to their home.
Mortgage and refinance scams are perpetrated by bad actors who are breaking the law. They might try to give the appearance that they're reputable lenders or brokers, or they might impersonate employees of nonprofit organizations or government agencies. These con artists often have professional experience in lending or ties to the mortgage industry, and they use their inside knowledge to spin a convincing web of lies.
How can you tell if a loan offer is a scam?
Scammers frequently change their tactics or tweak details of their bogus offers to evade detection. So if you come across a scam, it might not look exactly like ones you've read about or seen on the news. But there are some red flags that are common to many different fraudulent schemes. Watching out for these warning signs can help you protect yourself:
You're pressured not to consult with others
A legitimate financial company, nonprofit organization, or government representative won't object if you discuss documents with an attorney. They won't tell you to keep offers a secret from family or friends. If someone tells you that an offer is for your eyes only and that you can't get advice from anyone else, you're talking to a scammer.
You're pressured to respond right away
You should be suspicious whenever someone says you have to sign on a mortgage immediately or you have to decide to accept a mortgage relief plan on the spot. It's likely that the person imposing this tight deadline is a con artist who doesn't want you to take the time to evaluate their claims critically.
You can't verify the contact information you're given
If, for example, someone tells you they work for the government — like if they say they're from a local housing authority or the U.S. Department of Housing and Urban Development — then it should be possible to go to the website for that agency, call the listed phone number, and be connected to the person you talked to. If you can't get in touch with them this way, that's a clear sign that something's wrong.
There are no comparable offers from companies you recognize
The mortgage industry is competitive, so if one lender offers you a particular flavor of mortgage, you should typically be able to find similar products advertised by other lenders. If a lender is offering you an arrangement that nobody else would match, that's a good reason to be very cautious about it. For example, a lender might promise you a refund of thousands of dollars or a shockingly low interest rate, or they might have a complicated plan that requires you to take out multiple loans or purchase investments.
You're told to send money or share personal information up front
Scammers may ask you to wire money or share bank account details before they'll tell you more about their offer. Don't do this.
You're offered something for nothing
A scammer might tell you that if you agree to their offer, you'll get a free house. Or they might say that they can convince your lender to cut your monthly payment in half. Extravagant claims like this indicate that you're talking to a fraudster.
You're promised that everything will work out perfectly
Only a shady dealer will guarantee that you can avoid foreclosure by going along with their scheme, or that you'll definitely be approved for a certain loan.
You're singled out for your religion, ethnicity, or culture
If you're a member of any minority community, you should be aware of affinity scams, in which con artists target people from a specific demographic group. The scammer might say that you can trust them because they're a member of your community (whether or not they actually are) when they try to discourage you from vetting their claims too closely. They might show you testimonials from other people with the same demographic characteristics, or they might ask you to persuade other people from your community to apply for mortgages too.
8 common mortgage and refinance scams to watch out for
Mortgage and refinance scams are all over the map. Some target people who are shopping for a loan, others prey on people who are about to close on a mortgage or refinance, and others go after homeowners who are struggling to make their payments.
What these scams have in common is that the con artists pretend to offer valid products and services with your best interests in mind, when they're actually attempting to steal from you.
Keep an eye out for these fraudulent schemes:
Scams offering you a loan you can't afford
A scammer might tell you not to worry about insufficient income, a bad credit score, or a high debt-to-income ratio. The scammer then creates fraudulent documents that make it look like you're well-qualified to take out a mortgage.
At the very least, this scam leaves you with a loan you probably can't pay back and an extremely high risk of tanking your credit score and losing your home. It'll also land you in legal trouble for misrepresenting your finances.
And there's a good chance that a scammer who does this is setting you up as a "straw buyer." In this type of scheme, the fraudster submits the falsified documents to a lender and takes out a mortgage in your name. After you close on the loan, the scammer tricks you or pressures you into signing away the title of the property to them — so you're giving up the home you wanted to buy. The scammer then rents out the home until the lender realizes what happened and forecloses on the property.
House flipping scams
Some dishonest house flippers offer homes for sale at prices that are far above what the property's really worth. In this kind of scheme, the scammer promises to handle everything, including the loan application, appraisal, and inspections. They falsify documents so that it appears the home has a high value and your income and credit are perfect. Then, they sell you the home, and you're stuck with a run-down property and a mortgage that's way too large for it. If you can't keep up with the inflated mortgage payments, you lose the home.
In this phishing scheme, a scammer pretends to be your settlement agent, attorney, or real estate agent and emails you right before you close on a mortgage or a refinance. The scammer tells you that there's been a change of plans and gives you new instructions about where to wire the money for your closing costs and down payment. If you follow these directions, the money goes to a fake account and the scammer pockets the cash.
Bait-and-switch refinance scams
A scammer offers to refinance your mortgage to a loan with a low interest rate, low closing costs, and a substantial cash-out payment. Meanwhile, the scammer arranges for a lender to make a different, less attractive loan. The scammer might ask you to sign on the less desirable loan, hoping that you won't notice it isn't what you were promised. Or, you might sign documents for the loan you were offered, only for the con artist to alter the documents or forge your signature so that you're taking out the other loan instead.
This is one of many reasons it's important to have an attorney read your closing documents before you sign — and then compare them to final loan documents from the lender to make sure everything matches exactly.
Some scammers steal property titles through rescue scams. If you've fallen behind on your mortgage and are at risk of foreclosure, the scammer might promise that you can keep your home by taking out a "rescue" loan. When you sign the documents they give you, you're signing away the title to your home. They now own your home, but you're still responsible for the mortgage that remains your name.
In another variation of this scam, the fraudster tells you that you'll avoid foreclosure if you hand over the property deed to them and stay in the home as a renter. They might claim that you can buy back the property once your finances are in order. In reality, you still owe your mortgage payments after giving up ownership of your home, and the scammer will probably charge you exorbitant rent or evict you.
Scams impersonating housing counselors or government representatives
In these scams, con artists claim that they're from legitimate organizations or agencies and promise to help you avoid foreclosure or modify your loan. They might ask you to give them a fee upfront or tell you to send your monthly payments to them in the future. Or, they might instruct you to sign a document giving them the deed to your property.
Scams promising to audit your mortgage
A scammer might claim to be a lawyer or a forensic auditor and offer to audit your mortgage. The scammer might promise that they'll find errors in your loan paperwork, and that these discoveries will allow you to modify your loan and get a lower monthly payment or more time to pay it back. Or, they might claim that you'll be able to avoid foreclosure or cancel your mortgage once they reveal flaws in your loan documents.
The scammer typically charges thousands of dollars for this phony service, then ghosts you when the promised loan modifications don't happen.
Reverse mortgage scams
If you're 62 years old or older, a scammer might offer you a reverse mortgage, which would allow you to turn home equity into cash. The scammer then pressures you to give them the money, perhaps by presenting you with a bogus investment opportunity or arranging to do work on your home at an inflated price. Or, the scammer might trick you into signing a power of attorney that puts them in control of your bank accounts.
What should you do if you're targeted by a scammer?
If you suspect you're dealing with a scammer, don't comply with their demands. Don't sign any documents, share bank account details or other information, or give them any money.
Talk to an HUD-approved housing counselor, who can determine where you need to report the fraud and tell you what other steps to take. You can also reach out to the office of your state's attorney general or call the Consumer Financial Protection Bureau.
If you've already signed something or given money to the scammer, you need to get in touch with an attorney. And if you have an existing mortgage, you should contact your mortgage servicer to let them know what's going on.
Nobody can detect every scam by themselves. Scammers are often very clever, and no matter how smart or skeptical you are, you need another pair of eyes to go over financial arrangements before you agree to them. Consult with an attorney or an HUD-approved housing counselor — or ideally, both — before making decisions about a mortgage or refinance. And when an offer gives you a bad feeling, trust your gut.