Think you're knowledgeable about the housing market and home financing process? You may consider yourself an expert on mortgages (take this real estate quiz to prove it), especially if you're currently looking to finance your first home or have been a long-time property owner. But what about the numerous threats to your home and financial security that currently exist? They may not even be on your radar.
Though lending practices are now under a lot more scrutiny thanks to the housing market crash in 2007, it means predatory lenders and scam artists have to be that much sneakier when it comes to duping borrowers. Considering the number of mortgage delinquencies and foreclosures today's homeowners are experiencing, it also means there is plenty of opportunity for them to try.
Whether you're struggling financially—or even a current homeowner, for that matter— it pays to be aware of the most common mortgage scams so no one can profit off your inexperience or trust.
It's the oldest trick in the book, and now it's been adapted for use by unscrupulous lenders. There are many variations, but the gist is this: A potential borrower is baited with an enticing loan offer, like a competitive interest rate or low monthly payments. That person puts a serious amount of effort into preparing for financing, until shortly before it comes time to sign on the dotted line, the lender presents completely new—and much less favorable —home loan terms.
Victims of the bait-and-switch scam often go through with obtaining the more expensive mortgage because they feel they're already too invested in the loan to back out, or are fearful they won't be able to find financing for their dream home elsewhere. Meanwhile, the lender reaps a generous profit without having to do anything outright illegal.
2. Equity Stripping or "Leaseback Scheme"
You can't afford to keep your house: It's a nightmarish situation most would do just about anything to get out of. Unfortunately, scammers know this and use it to their advantage. Often presenting themselves as "mortgage rescuers," scam artists who prey on high-equity property belonging to struggling homeowners are nothing more than crooks.
Equity stripping begins with the promise to rescue a homeowner from their unaffordable mortgage. Facing foreclosure, the homeowner agrees to sign the deed over to a "rescuer" in exchange for the ability to continue living in the home as a renter, while the new homeowner pays off the delinquent mortgage. Meanwhile, these rent payments go toward buying the property back, with interest.
Of course, if you couldn't afford the mortgage payment, you probably can't afford your new exorbitantly high rent payments. Not to mention, the person you signed your home over to is simply pocketing the rent. Once you fall behind, you're evicted and the scammer keeps all the equity you worked years to build up in the home. In other instances, the new homeowner simply remortgages the home, cashes out the equity and skips town while it goes into foreclosure anyway.
3. Illegal Flipping
The practice of flipping houses has taken on a negative view within the housing industry and is often associated with mortgage scams, but house flipping has actually existed for decades and is entirely legal (some would argue unethical in some cases, however). Many have made a small fortune "flipping" homes—buying property at a low price (usually a foreclosure) and then fixing it up to sell for thousands more. Regardless of how you feel about the practice itself, it only becomes a scam when a person outright lies about the value of a home in order to profit from it.
Like any other mortgage scam, there are many ways to illegally flip a house. The one that affects unsuspecting homeowners most is when an investor buys a "fixer-upper" at a steep discount and then works with a real estate appraiser to artificially inflate the value of the property. A buyer is lured into securing a loan for this inflated amount (the closing agent is often in on the scam as well), and the home is re-sold at a large profit of which everyone involved takes a cut.
4. Loan Flipping
While some are in the business of flipping houses for a profit, some fraudulent lenders are taking the same approach to home loans. Much like leaseback schemes, loan flipping involves targeting a homeowner with substantial equity, but who is currently financially strapped, in order to drain that equity from the home.
Loan flippers will contact a homeowner with an offer to refinance at a lower rate and receive cash back. Whether the homeowner is in need of extra cash to make home improvements, fund a child's education, or pay off debt, the offer is certainly enticing. Need another $10,000? Refinance again.
Every time the mortgage holder refinances, however, there are closing costs and associated fees that must be paid. And of course, these scam artists will charge much more than a legitimate lender would. As you suck out all the equity in your home, they collect the fees and then disappear.
5. Phantom Help
There are a number government-sponsored loan modification programs designed to reverse the current housing market situation—so many, in fact, that it's nearly impossible to keep track of what they are. Mortgage scam artists will rely on this fact when they create fictional loan mod programs and dupe struggling homeowners into "refinancing" with them.
You're way behind on mortgage payments and foreclosure is becoming a looming possibility. Like an angel, a representative for a mortgage relief program contacts you with offers of help. All you have to do is provide an up-front fee to cover administrative expenses, like filing forms and making phone calls, while this person works out new loan terms on your behalf. When foreclosure notices come to you in the mail, the representative advises you to ignore them, as they're handling the situation.
Little do you know that when you originally fell behind on your mortgage payments, your lender filed a Notice of Default, making your mortgage troubles (and property address) public record—and you, easy prey. The scammer doesn't actually do anything to help your situation while collecting thousands of dollars from you, and once your home is lost to the bank, your phantom helper is gone.
How to Protect Yourself
Though mortgage scams are rampant, you can protect yourself if you're aware of the red flags and remain suspicious of any deal that seems too good to be true.
First, one of the telltale signs of a loan modification or mortgage scam is the request for an upfront fee. No legitimate program requires that you pay a fee prior to undergoing a loan modification and receiving assistance. Additionally, those who solicit mortgage relief door-to-door, via flyers or on telephone poles, are likely to be involved in fraudulent services. And if you're ever offered help that requires you to make payments to anyone other than your lender, or relinquish ownership of your property, beware.
The best thing to do when experiencing financial hardship is to contact your lender directly and ask for help; sometimes they'd rather take a smaller loss on a home by reducing your mortgage than a big one as a result of short sale or foreclosure. And remember, if you can't work out a deal with your lender, selling your home for a fraction of its original value is still a better option than losing it— and then some—to a scam artist.
Casey Bond is editor-in-chief of www.GoBankingRates.com, which provides readers informative personal finance and investing content, as well as the best interest rates on financial services nationwide.