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Mortgage Frauds: What They Are and How to Avoid Them

Mortgage frauds have an impact on every element of the home-buying process. For example, the Internet Crime Complaint Center of the Federal Bureau of Investigation reported around 13 thousand victims of rental or real estate fraud in 2020, resulting in a total loss of $213,196,082.1. Sounds crazy, right?

Since the mortgage money may be difficult to collect for many people, and that’s the money they care about a lot, checking twice which lender to trust – predatory lenders are continually refining their strategies to avoid regulators and trap borrowers.

No matter if you’re refinancing or buying a home for the first time – you should be really careful and twice more suspicious if there are any predatory activities.

What exactly is Mortgage Fraud?

Mortgage fraud is defined by Financial Institution Fraud (FIF) as any misrepresentation of facts on a home loan application that is often committed for financial gain or for the purpose of obtaining residence.

Mortgage fraud can be done because of financial gain or in order to gain ownership or change the appraised value of the house.

Mortgage frauds for profit:
Those attempting mortgage fraud for personal profit are often lenders, brokers, and other companies that make false statements to get financial compensation or equity from lenders and borrowers.

Mortgage frauds for housing:
Mortgage frauds for housing are often done by borrowers as an attempt to obtain ownership or affect the appraised value of a property.

As per the mortgage fraud index, 1 out of 200 refinancing applicants and 1 out of every 164 mortgage applicants, is considered as the one that has signs of fraud.

How to spot mortgage frauds

If it’s about the profit – fraudsters usually convince victims that they can save their houses from foreclosure through term modifications and debt management or that they can attract purchasers with free services and lower interest rates.

Fraudsters prey on trusting homeowners and homebuyers who lack education or financial stability. Predatory mortgage lenders frequently use misleading strategies to make their offer look like a good deal. In fact, it all lead you to become a victim of a scam.

The following indicators may point to mortgage fraud.

If it is too good to be true… it is probably a fraud. – Ron Weber.
Interest rates edition

If someone’s telling you to consider mortgage rates that are much lower than those on the market – this is an indicator of different hidden costs or perhaps a bait-and-switch scheme. You can also get familiar with the latest 2022 conforming loan limits in California to make sure you know everything in advance.

Suppose predatory lenders believe they can get away with it. In that case, they even may try to assure you that you no longer qualify for the advertised rate or add on additional fees after you have locked in the original rate.

Your Loan Estimate has not been honored

Your Loan Estimate provides essential loan information standardized by the U.S Department of Housing and Urban Development. It covers itemized loan expenses, including fees, and should be delivered within three business days after receiving a mortgage application.
Before approving the terms, lenders can not charge fees or other costs outside the credit report fee.

Mortgage lenders are obligated by the Real Estate Settlement Procedures Act (RESPA) to honor the Loan Estimate within the appropriate tolerance level. Be aware of predatory lending if these estimations are not respected in the absence of new circumstances.

A loan is bigger than you can repay

A mortgage payment should not be bigger than 28% of your monthly income.
The greater your debt-to-income ratio, the riskier you look to a mortgage lender. Be cautious if your lender recommends a kind of property that needs a loan exceeding 28% of your disposable income.

The property is overvalued

Overvalued property puts real mortgage lenders at risk by providing an incorrect resale valuation or an inflated borrower income that will be difficult to repay with existing revenue.

Prepayment Penalties

If you pay off your mortgage too fast or in case of refinancing, you will be charged a prepayment penalty. Although prepayment penalties might result in lower total interest rates, they are often hidden in the small print of contracts.

As a fact, many borrowers are unaware of the penalty terms and are charged with fines later on. In general, these penalties were created for lenders to benefit from interest payments at the borrower’s expense.

‘Your credit score? It doesn’t matter!’

Your credit score will always have an impact on your mortgage rate. Be aware if someone offers you a house loan that says your credit score won’t affect your mortgage. These scams prey on low-income borrowers and come with unfavorable terms.

And finally, how to avoid mortgage fraud?

As the real estate sector evolves with the sun’s speed, so do mortgage fraud strategies. To avoid them, keep a keen watch on your mortgage procedure and question anything you don’t understand.

Know the terms: Carefully read the documents, make sure they’re accurate, and ask for an explanation of mortgage terms and anything you don’t understand before signing.

Consult with licensed professionals: Check the licenses of everyone you work with (including lenders, attorneys, and mortgage loan assistance firms) on the HUD-approved state agencies database.

Don’t accept unexpected offers: Mortgage scammers frequently target vulnerable people. Keep in touch with your Home Loan Expert or mortgage service provider if you receive unsolicited loan offers.

Avoid paying any upfront fees: Paying advance fees for lending products or services to non-lenders is not acceptable.

Keep an eye on suspicious guarantees: Guaranteeing loan modifications is illegal; respectable organizations would declare that they cannot guarantee a change to the arrangement.

Mortgage scams adapt to economic changes and lending processes, making them dynamic and compelling. Therefore, when buying a property, refinancing, or dealing with a financial crisis, be wary of the qualifications of the persons you work with.

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