Common Mortgage Scams

SCAM 1:  Dishonest mortgage brokers

Be careful - the mortgage industry is full of dishonest brokers who knowingly try to rip off the consumer. These individuals prey on uninformed home buyers with the full intention of making a sizable commission and never being heard from again. These characters are usually in the mortgage business for only a short period of time and then move on to something else.

Unfortunately, the mortgage industry is not very regulated. For that reason, we have listed the four most common mortgage scams to look out for. Be careful when choosing who you obtain financing from because many brokers will say anything that you want to hear in order to get you in the door.

SCAM 2:  Bait and Switch

In this scam, the mortgage broker quotes a certain interest rate and fee structure, and will even disclose the rate and fees on a good faith estimate. However, the broker knows that a good faith estimate is just that- an estimate. To the client's dismay, when they get to the closing, they discover that the interest rate, fees, or both are higher than promised or extra fees have been added. At this point, especially in a purchase transaction, the buyer has little choice but to sign the paperwork or default on the contract and lose their earnest money.

SCAM 3:  Low-Balling Fees

Similar to bait-and-switch, many mortgage brokers will low ball fees on the good faith estimate in order to make their offer appear better. It is especially common in this tactic to low ball the fees for third party providers such as the title company or appraiser, or not property disclosing property tax and insurance escrow. When the real third-party fees are revealed at closing, the broker can claim innocence because these fees are not from their company, but from someone else. A good broker will get estimates up front from all parties involved in the transaction as well as the yearly taxes due and insurance cost.

SCAM 4:  Floating The Interest Rate

This scam can take two forms. The first is a broker who quotes a low interest rate knowing that the rate is not available based on the market that day. Instead of locking in the rate (guarantee the rate through the closing date), the broker "floats" the rate, not locking in until much later in hopes that the market will improve and he or she can get that rate. If the market doesn't improve, the broker is forced to lock a rate that is worse than what they promised up front and many times they don't tell their client about the higher rate until they find out at closing. Brokers may also use the practice of floating even if they quoted a legitimate rate in hopes that the market will improve so they can lock in later and make a better profit.

The other form that this scam takes is brokers who quote 10 day locks up front in order to make their interest rate seem more appealing. A 10 day lock will only do you good if your close date is within 10 calendar days of locking. Shorter term locks are less costly than longer term locks, so the rate will always be better for the 10 day lock. Generally, a 30 day lock is 1/8% higher in rate than a 10 day lock, a 60 day lock is 1/8% higher than a 30 day lock, and a 90 day lock is 1/8% higher still.

SCAM 5:  The Prepayment Penalty Scam

This mortgage scam is very common and involves brokers sneaking a prepayment penalty into their client's loan structure without their knowledge. Some consumers don't even know after the signing of the loan documents that they have a prepayment penalty attached to their mortgage. The reason mortgage brokers do this is because adding a prepayment penalty to a loan allows them to make more profit on the loan. Most loan programs offer the choice of whether you want to take a prepayment penalty or not. A good broker will make you aware of your options as a prepayment penalty will allow you to secure a lower interest rate. There are two types of prepayment penalties -- hard prepays and soft prepays.

Hard Prepayment Penalties:  These are the traditional prepayment penalties that most consumers are familiar with. A hard prepay is one in which you are penalized if you refinance or sell your home within a certain time frame. Typically, the penalty is 6 months interest, but the amount of the penalty varies from lender to lender. Most prepayment penalties have a time frame of 1-3 years.

Soft Prepayment Penalties:  As you can probably guess from the term "soft," this kind of prepayment penalty is not as bad as a hard prepayment penalty. If you have a soft prepayment penalty, you are only penalized if you refinance, and are not penalized if you sell the home. This is a great option in a rising interest rate environment like we are seeing today, as it is unlikely you will have to refinance.

Prepayment penalties should be disclosed at time of application and will also be disclosed on the Federal Truth-In-Lending Disclosure.