Mortgage Loan Scams
Mortgage loan scams or fraud are among a growing number of crimes involving real estate financing. Mortgage loan scams can take many forms and can involve multiple parties -- including buyers, sellers, investors, creditors, and real estate agents. Signs of potential mortgage fraud may include property flipping, equity skimming, and credit or income misrepresentation. Not only do mortgage scams threaten a homeowner or business individually, they can also wreak havoc on the national economy. This section includes information and resources to help you recognize mortgage scams and their various forms, as well as tips on what to do if you suspect mortgage fraud.
What is a Mortgage Scam?
Home buyers and borrowers need to be aware of the various types of illegal schemes that we collectively refer to as mortgage fraud or mortgage scams. Even if a lender offers to "help" you get a loan by falsifying income data, you could end up in foreclosure if you ultimately cannot afford the loan. You shouldn't be overly paranoid when meeting with lenders, but the ability to recognize signs of fraud will help you avoid most problems.
There are two main categories of mortgage fraud:
- Fraud for Housing -- This occurs when a borrower submits incomplete or false information in order to appear more creditworthy when applying for a loan.
- Fraud for Profit -- This occurs when a real estate professional, such as an appraiser, commits fraud with the goal of extracting money from a transaction.
Fraud can occur when buying or selling a home, refinancing, applying for a home equity loan, re-modifying a loan, or virtually any kind of mortgage loan process.
Common Types of Mortgage Loan Scams
Some types of mortgage fraud are more common than others, while some are extraordinarily sophisticated and unique. Here are some common scams:
- Fraudulent Documentation -- This often occurs when a borrower submits false or altered paycheck stubs in order to inflate their reported income.
- Flipping -- While quickly selling a home after buying it generally is not illegal, quickly reselling a property after obtaining a fraudulent appraisal certainly is.
- Straw Buyer -- Using the name and credit history of a proxy (another individual) in order to hide the actual borrower's identity.
- Silent Second -- Taking out a second, smaller loan (without the initial lender's knowledge) to pay for the down payment on the first loan.
- Equity Skimming -- Investor uses a straw buyer and false documentation in order to obtain a mortgage; then the straw buyer signs the property over to the investor after closing, who rents the property out until it is foreclosed (without making any payments).
Mortgage Modification Scams
There are a number of housing and credit counselors who claim the ability to help you save your home through a mortgage modification. Many of them are legitimate and can be helpful, but there also are plenty of fraudulent players in this space. While there is often some variance in how the legitimate ones operate, there also are some warning signs that indicate possible fraud. These include:
- Any explicit "guarantee" that they will save your home
- Charging $1,000 or so up front (there may be small fees, though)
- Asking you to "sign over" your home (you may end up losing your home but still liable for the balance on your mortgage loan)
- Advice to ignore your lender or to stop making payments
- Being asked to sign a blank or incomplete document
Home Equity Loan Scams
Taking out a home equity loan on your house is a great way to access cash for home improvements, maintenance projects, or emergencies. But you have to pay for that cash eventually, so make sure you know what you're getting into. Also, certain unscrupulous lenders may try to take advantage of borrowers, particularly those who are elderly. There are many different types of home equity loan scams, but the most common include:
- Equity Stripping - Lender provides a loan based on the equity in your home, not your ability to repay (often leads to foreclosure).
- Bait and Switch - Lender offers one set of loan terms but then pressures you into another type of loan when you sign.
- Deceptive Loan Servicing - Lender intentionally fails to provide accurate account information, hoping that you may overpay what you actually owe.
There is a lot of money on the table, and often multiple parties involved, when it comes to mortgage loans. This creates the incentive for some to engage in fraud. Click on a link below to learn how to protect yourself.