What’s A Mortgage Scam? How To Spot And Report Scams

8 Min Read
Updated Dec. 22, 2023
Young woman studying paperwork.
Written By Ashley Kilroy

Qualifying for a mortgage and buying a house is stressful enough without knowing that scammers are out there trying to reel you in with fake offers of low interest rates, debt relief and refinancing. However, it’s crucial to be vigilant of fraudulent activities. By working with reputable lenders and keeping your eyes on the prize of homeownership, you can avoid mortgage scams and stick with legitimate loan products. Here’s how to identify mortgage scams and report fraudulent activity if you’ve encountered a bad actor in the industry.

What Is A Mortgage Scam? 

A mortgage scam refers to a fraudulent scheme that exploits the mortgage lending process for unlawful gain. Mortgage scams can take various forms, such as false loan modification offers, equity-stripping schemes, or inflated property appraisals. These scams often involve manipulating victims into providing sensitive financial information or making payments under false pretenses.

In addition, dishonest behavior, known as mortgage fraud, can occur on the borrower’s side. For instance, if a borrower misrepresents their financial circumstances to obtain a loan, they commit mortgage fraud by lying on their mortgage application. While mortgage scams focus on tricking victims into surrendering money or information, mortgage fraud involves deceitful actions to access financial benefits within the mortgage industry.

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Common Types Of Mortgage Scams

When homeowners are in financial straits, scams can look like lifelines. Here are the kinds of scam offers that you as a homeowner could receive from fraudsters looking to take your money, your house and your financial information.  

Mortgage Modification Scams

A mortgage modification changes your interest rate, loan term or mortgage type to provide relief if you’re struggling to make your payment each month. Mortgage scammers present themselves as agents from the government, a bank or a lawyer’s office who want to help you avoid foreclosure by modifying the loan. They give borrowers phony paperwork to sign and charge a fee for their “service.” At the end of the process, the homeowner has given sensitive information and a hefty payment for one of two results. Either the scammer negotiates an unfavorable deal for the borrower or disappears after getting what they want.

However, legitimate modifications are available for homeowners in trouble. You can modify a mortgage by showing proof of financial hardship to your lender (such as unemployment or expensive medical bills) and asking what types of modifications are available. The key is to work with a reputable lender instead of scammers styling themselves as independent consultants who will process the modification on your behalf.

Wire Fraud Scams

Scammers can advertise online or call you, offering mortgages for borrowers with low income or poor credit. Additionally, they’ll reach out to borrowers who are about to close, posing as escrow officers collecting the closing costs. Unsuspecting borrowers provide their Social Security numbers and bank account information, thinking they’re one step closer to homeownership. However, the company is phony, and the borrower unwittingly wires payment to the scammer’s offshore account. This scam is devastating because the scammer has your personal details, and you pay a high fee while receiving nothing in return.

Refinance Scams

Beware of individuals masquerading as mortgage brokers or lenders who claim to help you refinance your loan for better affordability. Although legitimate refinancing programs exist, these scammers may present deceptive programs to rescue borrowers from foreclosure. They assure you that the paperwork pertains to a refinance loan that will rectify your mortgage situation, but unbeknownst to you, you are relinquishing ownership of your home. The documents posing as a loan agreement are, in fact, deed transfer papers.

This scam relies on borrowers not thoroughly reviewing the paperwork, which contains language regarding your consent to transfer ownership to the scammer. Subsequently, once the deed transfer is completed, you may believe your home is safe from foreclosure for an extended period, only to be confronted with an eviction notice later, revealing that you have lost ownership of your property. Unfortunately, by this stage, rectifying the deed transfer can be impossible. Borrowers looking to refinance can work with their lender or another reputable business in the industry for help.

Reverse Mortgage Scams

Reverse mortgages allow homeowners 62 and older to convert their home equity into a money they can use for anything. Unfortunately, while a reverse mortgage is a legitimate tool for seniors to boost their monthly income, scammers can use it for nefarious purposes.

Specifically, the scammer will approach seniors and offer to apply for a reverse mortgage on their behalf. The scammer submits an inflated appraisal to the lender and receives the reverse mortgage payments. They’ll send a portion of the reverse mortgage payment to the homeowner and keep the rest for themselves.

As with the other scams on this list, the dishonest behavior and misuse of the loan product are fraudulent, not the product itself. Applying for a reverse mortgage with a reputable lender allows you to receive income from your equity. As a result, it’s crucial to verify the credentials of any agents you work with and to communicate directly with well-known lenders for your mortgage needs.

5 Potential Mortgage Scam Red Flags 

Remaining alert to red flags can help borrowers guard against potential mortgage scams and make informed decisions when navigating the mortgage process. Identifying potential mortgage scams involves being vigilant for the following:

1. Charging Upfront Fees

Be cautious if a mortgage broker or lender demands upfront fees before providing services. Legitimate mortgage companies disclose fees beforehand and only charge them once specific services have been rendered. For example, you’ll receive a Closing Disclosure from your lender at least 3 days before closing on your mortgage, giving you time to review the loan terms before signing.

2. Quoting Unrealistically Low Interest Rates

Interest rates that seem too good to be true can indicate a scam instead of a legitimate mortgage. Quoting a rate that is drastically lower than the average market rate (which you can check online) can be a way to distract borrowers and deceive them into accepting a fraudulent offer or a loan with excessive hidden fees.

3. Offering Unrealistic Mortgage Payments

Beware of mortgage proposals that promise extremely low monthly payments. Scammers may present these to entice borrowers into giving their personal information or a down payment for a nonexistent loan or a mortgage with inflated fees.

On the flip side, scammers may offer mortgages with high payments while promising other benefits, such as an opportunity to refinance later. 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 consider your debt-to-income ratio (DTI) when reviewing your loan application. If a company wants you to take out a mortgage that costs more than 28% of your monthly income, it’s a sign to seek another lender.

4. Asking For Personal Information Too Early

A legitimate mortgage process typically involves collecting personal information at later stages. For example, a broker or lender may call to solicit your bank account information in exchange for mortgage relief. Likewise, a scammer might ask for your Social Security number and promise to fill out loan paperwork on your behalf.

5. Creating Urgency 

Scammers often employ urgency tactics to pressure homeowners and borrowers into quick decisions. If a mortgage professional insists on immediate action or claims that a limited-time offer requires swift commitment, it’s likely a sign of coercion. Legitimate mortgage transactions allow for thorough consideration and due diligence for both the borrower and the lender.

How To Report Mortgage Scams 

Borrowers who get scammed or encounter a suspected scammer can report this activity to the relevant authorities in the following order:

Report to the financial institutions involved, such as your current mortgage lender, your bank, or your credit card company. You can close or freeze credit card accounts and even try to stop a wire transfer.

If the scammer got access to your financial information, it’s crucial to freeze your credit with the major credit bureaus (Experian, Equifax®, and TransUnion®) to prevent the scammer from stealing your identity.

Your local police department. Ask for a copy of the report to keep as proof of the fraudulent activity.

Next, file a report with the Department of Housing and Urban Development (HUD). Doing so will alert federal and state law enforcement agencies to your case. In addition, HUD’s webpage includes a link to the Federal Trade Commission (FTC), which also accepts mortgage scam reports and works with law enforcement.

The Bottom Line

Mortgage scammers exploit borrowers by offering fraudulent forms of various loan products. These scams lure vulnerable homeowners with offers of legitimate mortgage products, including modifications, reverse mortgages and refinances. However, the scammer lies about the loan terms or steals from the borrower without delivering their end of the deal.

As a result, it’s crucial for borrowers to exercise caution, verify credentials, and avoid falling for a sense of urgency for deals that seem too good to be true. You can report suspected scams to financial institutions, credit bureaus, local police, and relevant government agencies like HUD and the FTC.

Vigilance and due diligence are key to navigating the mortgage process safely. To that end, it’s vital to work with trusted, industry-recognized lenders. You can be confident when you with a reputable mortgage company and receive the information you need before making pivotal decisions.

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