Mortgage scams to avoid come in a variety of different types and not all of them have to do with purchasing a home or applying for a new loan to so.
The Department of Housing and Urban Development warns consumers that mortgage scams frequently involve foreclosure avoidance schemes or refinance loans instead of new purchases.
New purchase loans are not always scam-free. But there are some things you can do to protect yourself when buying the property as well as staying current on your mortgage and refinancing it when the time is right.
New Purchase Mortgage Scams
There ARE mortgage loan scams that affect borrowers applying for the loan. In general, house hunters should consider avoiding contact with third parties offering to lend you money when you have not personally initiated the contact.
If you are contacted by phone, e-mail, or via social media about a home loan and you did not initiate the contact, your risks of encountering a scam are elevated. Telltale warning signs of a mortgage loan scam may include:
- Being told “bad credit does not matter”;
- A mortgage broker who refuses to disclose how they are paid;
- A lender who refuses to let you buy discount points to reduce the interest rate;
- Failure to provide an estimate or failure for the actual fees to reasonably match what was provided on the estimate (within certain limits--some cost variation is to be expected);
- Lenders who fudge the numbers on your income or the sale price of the property.
Refinance Loan Scams
The FHA, HUD, and the Consumer Financial Protection Bureau all warn borrowers against refinance loan scams. Such schemes can be easier to run in some ways because the initial contact may come via large volumes of spam email blasts sent out by the con artists. It does not take much to send thousands of emails with false promises to those who currently have a mortgage.
What are those promises? Lenders who offer the ability to skip payments on government-backed mortgages when refinancing can’t deliver on this promise since in general VA and FHA mortgages (just to name two types of government-backed mortgages and refinance loan programs) do NOT allow you to skip a payment when refinancing.
Another refinance loan scam to beware of? Offering excessive cash back in violation of certain home loan program rules. FHA and VA mortgages and refi loans do not permit cash back to the borrower (usually in excess of $500 or some other fixed amount) except in the form of a bona fide refund for money paid up front for items later included in the loan amount.
Some conventional loans may or may not permit cash back to the borrower, but if you are promised money back at closing time in excess of $500 (or other limit) on a government backed USDA, VA, or FHA mortgage, that is not permitted except as refunds as described above.
Yet another refinance scam to beware of involves loan modifications for borrowers in trouble on their mortgages. Any offer that includes you signing over the title of your property to a third party, or an offer that advises you to “stop making mortgage payments” is to be avoided at all costs.