Your house is likely your biggest investment and the one you work hard to maintain, improve and protect. At Own Up, we work with people to find them the best rate on a mortgage and continue with them on the homeownership journey. Part of that journey is recognizing and avoiding common housing scams that could prove costly. Below are nine such scams. Some are more common, and more costly, than others. We hope that by educating you, you can avoid all of them.
1. Unnecessary hard credit checks
Pre-approval letters are your ticket into the homebuying process. In a competitive real estate market, going to open houses without one is a waste of time because any house you are interested in will likely be gone before you get pre-approved.
There are two ways to check credit to issue pre-approval letters: A hard credit inquiry and a soft credit inquiry. Hard credit inquiries affect your credit score; soft credit inquiries do not. Some lenders will use hard credit inquiries on pre-approvals to dissuade you from shopping around for other mortgage rates as too many hard credit inquiries lower your credit score. This is not necessary. A soft credit inquiry is fine for a pre-approval letter.
If you are reading this in the midst of house hunting, take heart. There are a few versions of the FICO score. One of them considers all mortgage rate shopping inquiries within a 30-day period as one while the newest version gives rate shoppers 45 days for all related inquiries. One hard inquiry will typically dock you credit score by five points or less. To avoid uncertainties, don’t allow a hard credit check and take time to find the house you want. The letter is supposed to be a guide, not a hindrance to your future success.
2. Watch for Appraisal Fraud
Appraisal fraud was rampant during the lead up and aftermath of the housing bubble, which led to the 2008 financial crisis. Appraisal fraud is less common these days, but it still happens and can make the path to home ownership unduly expensive and frustrating.
Appraisal fraud occurs when an appraiser, or a buyer or seller, artificially inflates or deflates the value of a property so that it diverges significantly from the fair market value. This can cause the appraisal to come in below the agreed upon value of the house, preventing the loan from going through. For buyers, this loss is both emotional and financial as they have often already paid for an inspection.
If your home appraisal was set up by the bank issuing your mortgage, get a second opinion to make sure you are not being scammed. Appraisal fraud may be less of a problem than it was in the early 2000s, but it still exists, especially because appraisals are subjective.
3. Avoid Prepayment Penalties
Buyers get a mortgage specifically because they can’t afford the huge upfront cost of buying a house. Over time, though, your financial situation will likely change and you might want to pay more than the required monthly payment. For buyers not interested in refinancing and who already have a competitive interest rate, prepayment is the best way to do this. Paying under $100 extra a month can cut thousands off your mortgage.
To keep this door open, avoid mortgages with prepayment penalties. A prepayment penalty is a fee that some lenders charge if you pay all or part of your mortgage early. Not all mortgages have a prepayment penalty and those that do typically apply only if you pay the entire balance. In some cases, prepayment penalties also apply to paying extra principal. A new law passed in 2014 defined that prepayment penalties are allowed only in the first three years. If your loan includes a prepayment penalty, be sure to read the fine print before signing on the dotted line.
4. Wire Fraud
The down payment and closing costs for a house add up to thousands of dollars, more cash than most people have on hand, and if they do, federal officials are understandably wary. This is why the three main ways to pay for this transaction is a cashier’s check, a certified check or a wire transfer. Buyers who choose a wire transfer should beware: The FBI called wire fraud The $5 Billion Scam.
Here’s how it works: Thieves hack emails to find out who is about to close on a mortgage. Close to the closing date, they send those buyers a fake email from the title company with wiring instructions that will dump the money into a fraudulent account.
Homebuyers who choose to wire money should double check the wiring instructions with their title company or mortgage broker using a phone number they know is correct and then immediately check that the money went through.
5. Transfer of Mortgage Servicing Letter
It is likely that the bank who serviced your original mortgage will not be the same one holding that mortgage for the life of the loan. This means the servicing company that administers that loan (this is not always the lender) is also likely to change. When this happens, you will be notified by both your current mortgage servicer and the new company. Both notices must include specific information.
Thieves take advantage of the existence of these swaps to send out false mortgage servicing change announcements via mail or email requesting your personal information. If you receive a mortgage servicing change announcement, contact your original lender and request a statement of the servicing change before making any payments to a new address and account.
6. Closing Costs That Are Too High
House prices vary widely by neighborhood, by town and by state. But closing costs as a percent of the total loan do not. Typically, closing costs will be 2-5 percent of the total loan, though Realtor.com reports that number could be up to 7 percent.
This is a case where reading the fine print and doing the math pays off. Look at your paperwork. Closing costs typically include appraisal fees, credit report fees, lender origination fees, titles services, among others. If your list includes things you don’t recognize, ask what they are and why they are included. Also, do the math. If your total percent is significantly higher than 5 percent of the total loan, ask why before signing.
7. Refinancing Scams
Mortgage interest rates change over time and have a big impact on homeowners’ finances. If your home has significantly increased in value, your credit score has improved and/or interest rates are lower than when your current rate, it might be worth considering refinancing.
Scammers are well aware of all these factors and take advantage of them to send out fraudulent offers to refinance at a lower rate. These offers often come via phone or email. Don’t bite! Your current lender must sign off on any changes to your loan. The scammers will request personal information including your birth date and social security number, something a reputable bank will not request via email. The scam companies often charge an up-front fee and ask you to sign over the title. These are all signs of scam. If you are interested in refinancing, do your own research and contact reputable lenders.
8. Forensic Loan Audit
Homeowners who are struggling to pay off their loans are sometimes approached by companies offering to perform a forensic loan audit to review mortgage documents, reduce loan principal and provide speedier loan modifications. Occasionally these offers are also given to homeowners who are paid up on their mortgage. Who wouldn’t like lower monthly payments, even it there was a small fee to do so?
If you get these solicitations, do not respond. They are scams. These companies are selling lies to sell services that won’t help you anyway. The term forensic audit is a real one, but it applies to a different scenario. Forensic audits are examinations and evaluations of a business or an individual’s financial information to be used as evidence in court. If you are having difficulties paying your loan, contact your lender to see if there are payment plan options available.
9. Mortgage Restitution Lawsuit Offers
We live in a litigious time where lawsuits pop up about everything and anything. In 2016, the Federal Trade Commission halted a massive mortgage relief scam by a California-based firm who sold distressed homeowners access to a “mass joinder” lawsuit against their respective mortgage companies. The firm promised monetary relief and charged upfront for joining. This is not an uncommon scam.
Anyone who promises they can adjust your mortgage payment, and who is not your mortgage lender, is scamming you. Only your lender can do that. And if you were to sue your lender, you would need to prove your case individually in court. The rules of class-action lawsuits do not apply.
We hope you have never been scammed, but if you believe you have, contact the Federal Trade Commission and take immediate steps to address the issue.