Mortgage Scams: Common Traps And How To Avoid Them
For families facing foreclosure, a flyer in the mail advertising a loan modification program can seem like a godsend. After meeting with a fast-talking loan officer, they’re assured all the details are accurate and paperwork will be completed for a nominal fee. All they need to do is sign some documents.
Feeling as though they have no choice, the homeowners sign the paperwork. Little do they know they just signed ownership of their home over to this bad actor. Now, they’re facing eviction or paying rent forever on a home they formerly owned.
Unfortunately, mortgage scams like this happen every year. Homeowners and home buyers can find fraud hard to detect in a sea of financial lingo and opaque lending practices. If you’re in the market to buy or refinance your home, beware of the following mortgage scams. Doing so could save you thousands of dollars or even your home.
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What Is A Mortgage Scam?
A mortgage scam is a misrepresentation of information on a home loan application. The terms “mortgage scam” and “mortgage fraud” are interchangeable and benefit the perpetrator through the gain of profit or property.
Types Of Mortgage Scams
Unfortunately, deceitful lenders and loan officers have given home buyers many types of mortgage scams to look out for. Home buyers desperate for a loan or lacking financial education can fall prey to the following schemes.
Mortgage Payment Scams
A current homeowner might receive a letter informing them that their mortgage loan has changed ownership. The letter will instruct the homeowner to send mortgage payments to the new lender.
This scam puts homeowners in trouble if they send one or more payments to the fake company set up by the scammers. As a result, homeowners can lose multiple mortgage payments and fall behind on their mortgage.
Occasionally, lenders do take over mortgage loans. However, your current lender will communicate this change to you and tell you the new company’s name. The new company will then send you information regarding your mortgage and specify the principal, interest and escrow portions of your payment.
Documentation from your former and new mortgage lenders will always contain your loan number. If you receive communication with differing or no loan numbers, follow up with your current lender to verify any changes to your account.
Mortgage Lender Scams
Lenders offering interest rates far below the current average rates could be trying to scam prospective home buyers. Scammers entice unaware buyers with a low interest rate and then apply exorbitant fees after the fact. Or a few steps into the process, they will tell the home buyer that they don’t qualify for the rate first agreed upon and raise it well beyond market rates.
Another scam ignores your Department of Housing and Urban Development (HUD)-approved Loan Estimate. If your circumstances don’t change and your lender isn’t honoring your Loan Estimate or is charging extra fees, this is a predatory practice.
Furthermore, if a lender tells you your credit score doesn’t matter, look elsewhere. Companies telling you this try to prey on borrowers with few resources and charge them excessive fees for loans with unfair terms.
Mortgage Relief Scams
Homeowners facing foreclosure can feel panicked and helpless. Scammers try to capitalize on possible foreclosures by calling the homeowner and offering a fake service to avoid foreclosure for a fee.
The people running this scam will try to get you to give sensitive financial information over the phone so they can represent you to your lender. However, rather than advocating for you, they will charge you a large fee and most likely file bankruptcy in your name. This would ruin your finances and put you at risk to lose your home.
Additionally, a mortgage relief scammer might pressure you to give up the title to them. In exchange, they’ll offer to let you live in your home as a renter, with an empty promise that you can repurchase the title in a few years.
Remember, you should not discuss your personal financial information on the phone with anyone other than your mortgage lender or a HUD-approved counseling agency. Even though a company contacting you might sound legitimate, verify with your mortgage lender any outside party who wants to discuss your mortgage with you.
Loan Modification Scams
Like mortgage relief scams, modification scams involve false companies advertising their services as special government programs for homeowners in financial trouble. Scammers use official-sounding names to fool homeowners. Your mortgage lender can tell you if you qualify for any government programs that prevent foreclosure.
Home Refinance Scams
Homeowners looking to refinance can be susceptible to promises of a tiny interest rate, no closing fees or fast processing. Scammers hook homeowners with these offers, charge a fee (usually thousands of dollars), and then disappear.
If you want to refinance your home, your current lender must be part of the process. Scammers will urge you to give personal financial information under the pretense of filing paperwork or filling out documentation on their end. They might also require you to surrender your home’s title.
Communicate regularly with your lender if you are looking to refinance. You will usually only receive refinance offers from companies after you have started looking for a refinancing lender. Individuals or companies you don’t recognize who want to discuss refinancing most likely don’t have your interests at heart.
Appraiser Scams
Every home sale or refinance requires an appraisal. Appraisers can commit fraud to help an owner sell their home for an inflated price or get a refinance with better terms. Conversely, appraisal fraud can benefit buyers trying to get a lower mortgage.
In either case, appraisal scams deliberately mismatch the value of the home and the mortgage loan amount. Dishonest appraisers and loan servicers can work together to artificially overestimate a home’s value and then pressure the homeowner to take out a reverse mortgage based on the pumped-up number.
After closing the loan and running off with the profits, the homeowner has put thousands of dollars into the process and now has no equity because of the bad reverse mortgage.
Are Reverse Mortgages A Scam?
A reverse mortgage is a loan available to homeowners 62 and older that converts their home equity into cash that becomes an income stream during retirement. Unfortunately, while reverse mortgages are great tools for many seniors, scammers can use them to benefit themselves.
For example, a home improvement company could try to convince an older adult that their home needs costly repairs or updates. When the issue of payment comes up, the scammer suggests using a reverse mortgage to afford the work. The scam ends with an older homeowner setting up a reverse mortgage for the benefit of a dishonest contractor.
Another reverse mortgage scam involves real estate agents falsely promising older adults the benefits of a reverse mortgage to pay for a cheap property to live in or rent. In reality, tricked homeowners use their hard-earned reverse mortgage payments for run-down properties unsuitable for moving into or renting out in their present state.
In addition, scammers will tell homeowners to avoid foreclosure through a reverse mortgage. Typically, the scammer takes the money and vanishes, leaving older homeowners with a lost reverse mortgage and the same impending foreclosure.
How To Avoid Mortgage Scams
Though mortgage scams seem to occupy every section of the housing market, you can keep yourself from falling for even the most convincing con artists. Use the following tips to ensure the mortgage services you receive are legitimate and legal.
Seek Out Reputable Professionals To Work With
Working with reputable and accredited real estate professionals will help you avoid mortgage scams. Your lenders, brokers and agents should be from reputable businesses you recognize or verify by your current financial institution. You can also verify the licenses of the people you work with through a HUD-approved agency in your state.
Beware Of Mortgage Payments Exceeding 28% Of Your Income
As a rule of thumb, your mortgage payment should not exceed 28% of your monthly income. Lenders abide by this rule to curtail risk and will also consider your debt-to-income ratio when considering providing you a loan. If a lender wants you to take out a mortgage that costs more than 28% of your monthly income, it’s a sign to work with other lenders who abide by the standard.
Steer Clear Of Products Or Services That Charge Upfront Fees
As stated earlier, many scammers rely on pressuring homeowners and home buyers to make a payment upfront for what seems to be an impossibly great deal. To counteract the false sense of urgency, ask to get everything in writing and review it thoroughly before making any mortgage-related decisions. Additionally, reduce your risk of being scammed by communicating regularly with your current lender. They can act as a fact-checking party on your behalf.
Contact The Appropriate Government Agency
If you believe you have suffered from a mortgage scam, you have the support of several government bodies. According to the Finra Investor Education Foundation, you should first contact your local police station to report the scam. Secondly, contact your state attorney general about the issue.
Additionally, you can communicate with the Federal Trade Commission regarding mortgage fraud cases. Another option is to contact HUD, who’ll then share your report with other law enforcement to address your concern. When you contact government entities, they will work with the FBI to pursue justice for those who have been victims of mortgage scams.
The Bottom Line
Scammers regularly target home buyers who have access to fewer resources and less information. By verifying the identity of any individual or company that contacts you and holding off on paying up front on deals that seem too good to be true, you can avoid becoming the victim of a mortgage scam.
Always communicate with your lender if you are suspicious about a current mortgage or refinance offer you have received. If you have any mortgage concerns, talk to an experienced Home Loan Expert.

Ashley Kilroy
Ashley Kilroy is an experienced financial writer. In addition to being a contributing writer at Rocket Homes, she writes for solo entrepreneurs as well as for Fortune 500 companies. Ashley is a finance graduate of the University of Cincinnati. When she isn’t helping people understand their finances, you may find Ashley cage diving with great whites or on safari in South Africa.