As a real estate professional, you have plenty of experience dealing with title companies, closing attorneys, escrow agents, and mortgage lenders. Subsequently, you probably know how to spot (and likely have already seen) evidence of common mortgage scams attempted by predatory lenders and other bad apples. First-time homebuyers, however, have little experience with mortgage scams and probably won’t know what to look for and how to avoid falling victim to one.
It is part of your duty to guide your clients through the mortgage loan process safely and help them avoid unscrupulous lenders. When they are looking at loan offers, closing costs, and loan terms, make them aware of the following mortgage scams so they don’t wind up with an offer that is too good to be true and risk losing their home.
1. Not Being Realistic About Your Loan Payments
Reputable lenders follow strict guidelines to ensure that they are granting a home loan only to those who can actually afford to make their mortgage payment on time each month. Predatory lenders care little about that, seeking only profit for themselves. The Department of Housing and other organizations have severely stamped down on predatory lending over the last decade, but some unscrupulous lenders still abound.
Warn your clients that if the lender does not help them to create and review a household budget, or at least discuss finances in detail, it could be a sign that they are not overly concerned with the prospective homebuyer’s ability to pay. As a guideline, a mortgage payment should be no more than 28% of a person’s gross monthly income. If the lender is making a loan offer with payments being more than that, it’s not only too good to be true — it needs to be avoided at all costs.
2. Unexpectedly High Loan Costs
While loan costs from different loan offers will often vary a bit, many of them are fixed and/or with a certain range. For example, depending upon the lender and the mortgage, a home buyer can expect to pay between 2% to 5% of the loan amount for closing costs. Homebuyers need to be on the alert for loan costs that exceed that amount. They also want to avoid any lenders that are asking for upfront fees or adding things to closing costs that don’t appear on the good faith estimates provided by other lenders.
3. Prepayment Penalties
While not exactly a mortgage fraud or scam, prepayment penalties certainly aren’t something a home buyer would want to have as a condition of their mortgage loan either. It is essentially a penalty fee that is charged for paying off a loan early. Homebuyers should look for this when reviewing their loan documents, and ask for the penalty to be removed or avoid this lender if they refuse.
4. Interest Rate Scams
Another too good to be true mortgage scam — interest rates that don’t really match the current posted interest rates, such as one much lower or much higher. When rates like this are offered, there is usually something else going on that will wind up costing the home buyer more than they expected. Lenders who pressure a homebuyer to accept a particular interest rate is also a red flag. Many interest rate mortgage scams also involve balloon payments or prepayment penalties, another red flag.
5. Not Being Offered the Points Option
Buyers can sometimes secure a lower interest rate by paying for points — essentially a prepayment of mortgage interest. Most reputable lenders offer this option. If one doesn’t, it may be a sign that something is amiss with the loan offer.
6. A Lender That Says Bad Credit Won’t Affect Things
Obviously not true, and while it doesn’t necessarily mean a homebuyer with bad credit won’t get a mortgage loan, it does certainly make things tougher. Predatory lenders typically target low income individuals by promising home loans even with bad credit. The loan terms for such loans are usually pretty bad.
7. Loan Terms With Balloon Payments
A balloon payment that is part of loan terms may seem like a good deal at first — the home buyer gets to make lower payments in exchange for making one large payment at the end of the loan term. But this amount can actually be extremely high, and homebuyers are taking a big risk as to whether or not they will have substantial funds to make the balloon payment when it is due.
8. Not Honoring the Good Faith Estimate
A reputable lender must honor the good faith estimate — the document that discloses the interest rate and estimate closing costs for a particular home loan. When a lender changes the estimate, it’s an immediate red flag. Likewise, if no good faith estimate is ever provided. By law, good faith estimates should be given to a homebuyer within 3 days of receipt of a mortgage application. It is provided on a standardized form issued by the U.S. Department of Housing and Urban Development (HUD).
9. Mortgage Closing Scams and Wire Fraud
Aside from having to worry about predatory lenders, homebuyers and real estate professionals also need to worry about falling victim to cyber criminals and identity thieves that are attempting earnest money deposit fraud or closing cost scams with fraudulent wire transfers and/or cashier’s checks. Such scams are unfortunately quite numerous, but using an ACH money transfer system can significantly reduce the risk of fraudulent activity.
Paymints.io, for example, is a secure electronic money transfer system that is ideally suited for the real estate industry. It enables homebuyers to send earnest money deposits and other payments to the escrow officer in a safe, secure manner. Using bank-level encryption and advanced identification protocols, paymints.io ensures that both parties involved in a money transfer are who they say they are.
Homebuyers and real estate professionals should always verify banking information to ensure it is correct before conducting any money transfers. Additionally, if you feel that you are being contacted via email or text by someone who may be a cyber criminal, simply make a phone call to your contact to confirm the message is legitimate.
Homebuyers who are seeking to learn more about the mortgage process and gather information that can be used to avoid falling victim to predatory lenders and mortgage scams can find plenty of good resources on online forums and blogs.
To learn more about how using paymints.io can be safer and beneficial to both your business and your clients, schedule a free demo today!