Have you thought of buying your dream house? It may not be too far away. With enough money, you could move there next month.
But that’s easier said than done. Financing 100% can be risky, especially with the constant housing price changes. If you have a change of heart, you don’t want to be tied up with the wrong property.
If you get a mortgage, however, your options expand. You have more buying power for better homes, and you can buy it with a convenient recurring payment. If you have made up your mind, mortgages are worth the extra cost.
But don’t confuse this cost with fraudulent rates. As the housing market grows, some agents have started to use sneaky techniques to inflate the property’s perceived value. It’s not rare to find misleading or omitted information to approve borrowers who may not qualify.
Fraudulent mortgages lead victims to long-term financial problems, if not permanent. Credit score changes, debt, losing equity, identity theft, among other risks.
Nobody said getting your dream home would come cheap, but overpaying is neither an option. Mortgage fraud is on the rise, and it can happen to anyone who doesn’t know the risk.
- When Your Mortgage Turns Into A Scam
- Types Of Mortgage Scams
- What You Should Know About Mortgage
- What To Know Before Getting A Mortgage
- What To Do Before Signing The Contract
- What To Do After Getting The Loan
- How To Report And Stop The Scam
- The Bottom Line
When Your Mortgage Turns Into A Scam
Buyers make the downpayment and get a mortgage with fixed rates. What they don’t know is they’re paying more than the property is worth.
- The borrower misstates the property value.
- The consumer lies about the property conditions to get lower rates they don’t qualify
- The borrower invents or steals information to get the mortgage approved
- An agent offers to “rescue” an owner who’s falling behind their mortgage payment
In a mortgage scam, someone misrepresents the facts to get an (economic) benefit they don’t qualify. As a borrower, lying on an application gets you a better rate by defrauding the lender. But as a lender, you could help a buyer get approved, but then overwhelm them with unreasonable rates.
Each mortgage scam contains some type of misstatement, misrepresentation, or omission relied upon by an underwriter or lender to fund, purchase or insure a loan. Mortgage scam is easily practiced particularly where mortgage industry professionals are involved.
The true level of mortgage scam is largely unknown because a significant portion of the mortgage industry is void of any mandatory fraud reporting. In addition, mortgage fraud in the secondary market is often under-reported. Based on various industry reports and analysis, mortgage scam is pervasive and prevalent.
Without the right communication, anyone incentivized can hide or misstate information. That could explain why these scams are so common— and why borrowers feel confused in general.
Why Is Mortgage Fraud Prevalent?
Does it sound familiar to you? Look no further than the 2007 mortgage crisis:
2007 was the year of “Fast and Easy.” Anybody who wanted to live their own American dream could get a mortgage with little or no qualification. Most would get approved, and if it didn’t work out, you could always misstate the facts to your lender.
The plunge of home prices revealed the truth: homebuyers who faked their applications couldn’t pay off their loans. Foreclosure rates almost doubled that year. But due to the low prices, that still wasn’t enough to compensate for the losses. Welcome to the 2008 recession.”
Note: Mortgage scams share patterns with accounting fraud. Data misstatement as one of the biggest reasons behind large scale crises.
Those who don’t learn from the past will repeat the mistake in the future. Mortgage scams were part of the cause, but certainly not the only one. The question is: where are we heading on today?
Here’s why mortgage scams are here to stay:
- Homeownership rate: Despite the collapse, rates stopped falling in 2016 and kept increasing since then. 2019’s 65% rate pointed to a demand increase, which increased competition. Dishonest agents pulled on mortgage scams to stay ahead of everyone else. Most buyers prefer loans to buy better properties, even if it costs more in the long run.
- Hidden Information + Ignorance: Buyers look at a mortgage as the solution, but many don’t know the actual amount they should pay. Should you lock your rates? How do you know if those numbers are accurate? A buyer who overlooks conditions won’t be suspicious of inflated rates.
- Confidence + Greed: Although past events help us understand the future, nobody can make accurate predictions all the time. On good times, greed makes owners set higher prices than the property is worth. Buyers also get into this delusion with the confidence that housing prices will keep going up, hence following misleading information.
- Rising Interest Rates: Getting a mortgage has changed since 2007. Lenders give priority to borrowers with the best history and credit score, and today’s conditions are tightening. Buyers are rushing to get their loan before it gets harder to qualify in the future.
These powerful incentives lead people to misrepresent information, often causing hard-to-undo problems.
Mortgage fraud can cause negative effects:
- It can lead to predatory lenders
- Identity thieves can steal your home equity.
- The lender approves a loan based on the wrong data.
- You could trap yourself into a loan you can’t repay.
- Mortgage scammers can take your equity and credit, which can take years to fix and will complicate any future deals.
Notes: In insurance scams, agents may sell mortgage insurance you don’t need. Unless you qualify for their strict conditions, you’ll overpay for nothing.
Types Of Mortgage Scams
Recognizing fraud isn’t easy due to the many possible misstatements, whether it’s a stolen identity or an inflated property. These omissions lead to mortgage scam variations, each one with different risks and motivations.
Fraud For Profit
Inflated appraisals, loan scams, identity theft. The con man— usually a professional — uses his knowledge and authority to trick the loan process. The homebuyer could risk his identity, equity, and all his money.
Industry insiders work together and can target anyone:
- Pose as borrowers and owners to trick lenders.
- Pose as buyers and lenders to trick homeowners.
- Pose as owners, lenders, or both to profit from borrowers.
Who will they likely scam? The home buyer who has the money they want.
#1 Identity Theft
Without you knowing it, a thief can use personal data to qualify for loans and buy with your money. It only takes one fraudulent email to get your information.
Someone who knows about your mortgage process poses as a lender on email. They ask to complete the form you’ll find after clicking on their link, which will steal your information. This phishing attack has nothing to do with the real lender or homeowner.
Phishing attacks also target realtors to monitor properties for sale. Once they’re closing the deal, the thief replaces the realtor’s banking number with his number and sends it to the client.
Later, a lender could approve a loan for the thief who wouldn’t have qualified otherwise.
#2 Inflated Appraisal / Property Flipping Fraud
An appraiser misstates the house value by omitting or faking information. If the homeowner can sell the property for more, he will compensate those who helped him: appraisers, mortgage brokers, or attorneys.
The buyer may miss the red flags if the inflated price is reasonable. Some clients have no problem paying more for the dream house, but the price should reflect real value. Illegal property flipping happens after you misrepresent data, usually followed by kickbacks and fake documentation.
If the real value of a property is, say, $200K, dishonest insiders could sell it to an investor for $350K after a (fake) estimation of $500K. The scammer takes the $150K and gives a portion to his contributors.
What about the investor? He’s tied to an overpriced property they won’t resell for profit. If they got a mortgage to pay for the home, they pay even more.
#3 Loans And Debt scams
People fail to meet their payments due to bad decisions, accidents, and life events. If you fall behind, you should discuss with the renter a repayment plan, debt negotiation, or forgiveness. It may prevent foreclosure, which takes debtors’ home.
When foreclosures start, they appear published on public websites, so anybody (scammers) can see it. A con man can reach out to the borrower and offer false help in exchange for money. If their deal is promising, the debtor may get even more into debt to pay the scammer and lose their home anyway.
Borrowers who pay “phantom helpers” fall into the advance fee scam. They can’t stop foreclosure, only delay it or by ruining your credit. They typically ask you to keep private for your creditors (so that you don’t get real help).
#4 Equity Skimming
A homeowner facing foreclosure receives help from an investor. This one promises to buy the property, stop the process, and return it later.
When the investor buys, the homeowner conveys the title on him for the loan. Now that the investor can access the home equity, he can either walk away or rent the property until it forecloses.
The original owner has now to either pay overpriced rent or leave, losing the equity.
#5 Predatory Lending
A lender offers help to buyers with low income and credit. They encourage applicants to lie for their mortgage: “People do it all the time.”
- The buyer borrows from the predatory lender
- The creditor may work with fraudsters to inflate the appraisal.
- The lender gets a larger amount than they needed, which includes ridiculous fees and interest rates.
If that’s not enough, the lender can increase the rates to make it harder to pay off. As soon as the borrower fails, they start the foreclosure process.
If the victim reports, the authorities will find out about their faulty application, which involves a hefty fine and other penalties.
Note: In foreclosure scams, scammers target borrowers to get into more debt with false rescue promises, often taking the home equity.
Fraud For Housing
Buyers who want to get a house at any cost will lie to their lenders to get approved. But as shown in predatory loans, lenders can encourage borrowers to misstate data and then use it against them.
- Occupancy Fraud: When applying for the mortgage, the borrower chooses the most convenient options to get lower rates. If you live in the house, for example, you get a lower down payment and interest rates than if you rented.
- Financial Misstatement: Borrowers lie about their professional background and income to get loans they don’t qualify.
- Air Loans: A skilled con man fakes documents to make up buyer and property information. The lender then approves the mortgage for applicants that don’t exist or have their information stolen.
Note: Scammers can steal information to qualify for loans and deceive lenders who can’t confirm their credentials. (see Synthetic IDs on Identity Theft Scams)
What You Should Know About Mortgage
You want to get that home with a comfortable payment plan. But it becomes more complex depending on the contract length and professionals involved. As a new buyer, why take the risk of mortgage scams?
Lenders may say they’re your only way to get that home, but you may have overlooked the mortgage alternatives.
Cosign your mortgage
You can share responsibility with someone with a stable income, low-debt, and good credit. Cosigners have no roles other than assisting for the payment.
If someone has a better history, they could qualify for better loans and sign you in. You are borrowing their history to get better rates.
Finance 100% Of Your Home
When people get thirty-year mortgages, they expect a stable future where they pay the lowest possible amount. Aside from the interest rates, your loan is riskier as you add more time.
Things never go like we planned. Delaying the total payment only opens the door to more uncertainty. There’s no such thing as “stable income,” and nobody predicts the future. You may lose your home along with the equity and all the other payments you made.
Paying 100% may put you on a tough spot today but secure a house with no debt for the future. You can try to increase your income, wait for it to depreciate, or make a larger down payment.
If you can’t pay that much in advance, you may be trying to buy something you can’t afford. Consider whether you should save more or buy a more affordable house.
Who said that money has to come from your pocket? Your current property might pay for your dream house.
Buy low and sell high. Instead of buying your house, increase your capital:
- Find and own a property you can afford
- Invest & learn how to add value to a house.
- Share commissions with a realtor if you can’t sell it on your own.
- Take the difference to afford a better property.
You’d be investing in the same property you occupy. Although it can be tricky to coordinate your sale with another purchase, having a clear plan will help you succeed and profit. Best of all? You don’t need any money you don’t have. You create no debt.
Get A Better Deal
If you’re taking the traditional road, don’t commit to unreasonable rates. If friends or family can lend you money instead, you can the lender’s interests.
Improve your credit, increase your income, and you will get better loans. You could pause the home buying process until you improve your history and save more money.
What To Know Before Getting A Mortgage
You’ve looked at the alternatives and chose a mortgage as your best option. Where should you start?
One mistake in this process could cause serious financial problems. Before applying for a loan, stick to preventive measures to avoid surprises.
Working with credible lenders reduces any chance of fraud. Always working with the same one saves you from looking for new lenders, which is a risk.
Ask your connections to refer you to a lender you can trust. Although you could check for red flags on your own, experienced buyers will save you time qualifying lenders.
Lending is about trust: it’s not about the deal, but who makes it.
Don’t just trust what sellers tell you on a website. The house you’ll buy may not exist, so verify the facts before committing to a loan. If possible, meet the property seller. Instead of relying on pictures, visit the property.
Avoid online mortgage lenders, but if that’s your best option, get as much communication as possible. Avoid the risk of hidden/omitted information.
If you don’t like the deal, there’s always a better one. Finding your dream home at an affordable price may seem impossible to refuse. Be open-minded: as long as you don’t sign the contract, nobody can force you to take the deal. Not even that aggressive lender.
After finding your favorite deal, keep comparing lenders and properties. Don’t let them believe they’re “your only choice.”
As an experienced buyer, you should already know how much a home should cost, what you will pay, and for how long. If your expectations are below the price, you can consult with an expert in case you missed something.
If the appraisal is indeed inflated and they can’t prove you wrong, you can:
- Ask the seller for an explanation.
- Request a second appraiser.
- Look for a better deal somewhere else.
What To Do Before Signing The Contract
Borrowers expect contracts to reflect what they agreed with lenders, but it doesn’t have to be that way. A dishonest lender could change the contract and hide it with euphemisms. If the borrower asks them a question, they’ll say:
- “It’s what we’ve already covered on the phone. What you see on paper is what we agreed on, nothing else.”
- “It’s mere legal jargon to formalize your application.”
- “Everything you need to know is on the contract.”
Don’t sign unless the document is crystal-clear. Consult an expert to verify the terms for you.
Avoid Aggressive Lenders
A lender who wants to approve you at all costs will likely scam you with unreasonable rates. If lying helps to get you approved, they’ll encourage you to do so.
A lender that supports lying is probably lying to you as well. You’ll think you got approved, but then fall behind the payments they impose you.
Note: In loan scams, lenders may not care at all about your history, only your credit card. They promise to approve a big loan fast if you pay X hundred dollars upfront (advance fee scam).
Offer More Down Payment
Pay more today so that you have fewer problems tomorrow. If you get trapped with high-interest rates, you may not pay it back. Some scammers offer loans requiring no down payment for this purpose.
Be Cautious With Phishing Scams
After you start looking for a loan, mortgage scammers may target you with phishing emails. You start getting vague messages posing as your lender.
“Hi <Name>, We’ve approved your mortgage application.”
After applying for your dream house mortgage, that email is just what you want to hear. But if you get emotional, you may miss the phishing red flags.
What To Do After Getting The Loan
Even if the contract goes as expected, scammers can still attack after you complete the steps. Identity theft, for example.
It’s advisable to keep a copy of everything you signed, so you can review it and use it as proof if they misuse your signature.
It won’t hurt to check your credit score from time to time in case something doesn’t match. It prevents identity theft and credit fraud in general.
If you ever detect fraud, you’ll find out fast before the con man had time to react.
How To Report And Stop The Scam
After confirming the red flags, immediately call the authority who investigates mortgage fraud. Send a report to the FTC, who will review and reach back with a recovery plan.
If you suspect identity theft, contact the lending institution to flag the scam. You can get a credit fraud alert to tighten your security and avoid losing more money.
The Bottom Line
The best way to prevent mortgage fraud is to not take loans at all. People who need money are exposed to the most scams, which is why this scheme has increased over the years.
If you thought of a mortgage as a comfortable way to own your house, think again. Loans cost you more in the long run, and risks increase the longer you take them.
Although mortgage saves money today in theory, you can only do so much with a saving mentality. Increasing your income is the fastest way to free yourself from financial stress, avoid scams, and get your dream home.