When I was in the medical field years ago, the number one rule in treating an illness was, "First, do no harm." This carries over into the mortgage and real estate business. On occasion, however, someone comes along who has less than admirable ethics. It is these dishonest people who come up with all sorts of scams to fleece the unwary of their hard-earned dollars at best, and their homes at worst.
One scam involves a real estate agent, the property seller, an appraiser, and a lawyer or title company. An under-informed home buyer is found and the real estate agent and seller get the buyer to agree to purchase the home and have them sign a contract for a certain amount. When the property is appraised, the appraisal is 15 percent to 20 percent higher than the purchase price. The real estate agent or the seller will then require that the contract be re-written to sell the property at the higher amount, telling the buyer a second mortgage will be made by the seller for the additional amount and that it will be forgiven after the closing and the buyer will have this additional money as equity in the new home. The title company then shows the original sales price on the settlement statement. This falsely shows a large amount of equity in a home but in reality the original price was the full market value or slightly more. The new buyer has no equity and may actually owe more than the property is worth.
One of my clients in another state actually had this happen. Due to my diligence we caught these people in the act. My client still wanted the house but at my insistence he bought it at the original fair sales price. I want to be clear that there are times when a property will be legitimately more valuable than the sales price but warning flags should start flying if there is any mention of a second mortgage that will not have to be paid or if there is a demand of a new contract at the higher price.
A few months ago I had a couple from California contact me saying they were in trouble and about to lose their home. The husband was ill. They were retired and needed the money from the equity in their home. A loan officer had told them she would get them a reverse mortgage (normally a good thing to have). She then told them they should not make any more payments on their home as this was a "sure thing." After three months of waiting the original lender started threatening foreclosure due to non-payment. The loan officer then told them that if they would make the payments to her she would make sure to work things out with the other lender since she was doing a reverse mortgage. They made the payments and were then told they would have to file bankruptcy since the plan had not worked. They were then told they would have to enter a special program to keep their home and would have to sign over the deed of their house to the loan officer. This made them tenants in their own home. The loan officer never made any payments to the original lender and the property was foreclosed upon. They also lost all the money they had paid to the loan officer. By the time they contacted me their credit was ruined, it was too late the stop the foreclosure, and it was too late for me to help them.
Red flags should start flying anytime a lender tells you not to make payments on your existing loan. Anything can happen during a normal loan process and unexpected delays can and do occur. It will negatively impact your credit if you do not make payments and you are responsible for those payments until the day the loan is refinanced or paid off.
Red flags should also start flying if someone suggests during the course of a loan that you sign over your house to them. These two are obvious signs of a scam. Report them to the authorities if you are suspicious.
There is a scam that involves an unscrupulous person selling a house, a mortgage broker or loan officer, and an appraiser. It works like this: A loan officer or mortgage broker finds a borrower who can qualify to buy a home for, let's say, $75,000. Someone finds a house worth $30,000. The loan officer or broker gets the appraiser to appraise the property for $75,000. The borrower buys the property thinking he or she is getting a more valuable house. The loan officer and the appraiser split the remaining $45,000 between them. The buyer now owns a home which is worth far less than what he or she paid for it and the buyer will not be able to sell it or borrow against it.
A creative scam has been devised that involves an unethical loan officer or broker in which a person who has never had credit problems is steered towards a loan with higher rates and fees than the borrower would actually be required to have. The loan officer makes more money on this type of loan even though the borrower could actually qualify for a less costly loan.
If you have paid your bills on time and have a good credit history, it should be a red flag if the interest rate and fees you are being charged are more than you believe your credit warrants. If your credit scores are in the upper 600s or higher and you have no recent bankruptcies, foreclosures or tax liens, you should expect premium rates and products.
If in doubt, ask the loan officer to let you see your credit report. If the loan officer refuses, this would be indicative of a potential problem. I will typically give my borrowers a copy of their report if they request it. Also, it does not hurt to ask around and find out what others are being charged in rates and fees. Let me add that some unscrupulous lenders will often target the elderly or minorities with this scam.
Borrowers who are in serious financial need may be especially prone to being targeted in a scam known as equity stripping. A borrower in serious financial need will want to refinance his or her home to get the equity out so he or she can pay bills. A loan officer will tell the borrower that they can get more of a loan by padding the amount of income they put on the loan application. The borrower knows he cannot afford to make the high payments but does it because his need is so dire, he must have the money. At some point, the borrower will stop making payments because he cannot afford it and the property goes into foreclosure, stripping the property of its equity. The homeowner loses his home and has ruined credit because of the greed of a loan officer.
A good loan officer will never do a loan just because it can be done. He or she will be very conscious of your actual debt-to-income ratio. He or she will consider your house payment and debts you owe while taking into account your children, their ages and expenses, as well as other things. He or she will want you to be happy in your home. He or she will want you as a happy client for life.
I recently told a family I would not do a loan for them on their dream home. Their debt-to-income ratio was a little high, but when I took into account three teenage girls in the home, it became apparent that school expenses, proms, dates, clothes, cell phones, college, and all the other unlisted expenses would make them have to either do without some things, or not pay for their house. I got them into a similar house, but one far less expensive.
There are more scams that are perpetrated upon the unwary and I cannot cover them all here. In general, follow these tips:
• If it sounds too good to be true, it probably is.
• Do not enter into an agreement where a higher interest rate is given, but you are told you can pay a lower rate and the lender will take care of the difference.
• Don't fall for such promises as, "we'll save your credit," "We'll buy your house ‘as is'."
• Do not sign away ownership of your property without the advice of a lawyer you trust.
• Do not agree to seller held second mortgages that will "go away" or be "forgiven" after the closing on your new house.
• Do not sign any new contracts when purchasing a house that is higher than the original agreed upon price.
• Do not sign any contract where you are not formally released from your mortgage liability (such as, when refinancing your home).
• Do not stop making all of your mortgage payments and other bill payments until the day of closing on your new purchase or refinance.
• Do not make any payments to a bank or loan officer, real estate agent, or title company. Make your payments only to those whom you actually owe money, such as the lender on your home mortgage.
• Be very cautious if a company describes itself as a foreclosure service, collects a fee without first performing a service, advertises to people whose homes are being foreclosed upon, or asks you to make your mortgage payments to them rather than your mortgage lender.
Most mortgage brokers, loan officers, bankers, real estate agents, appraisers, title companies and lawyers are good honest people. They work keeping your best interest in mind. However, there are a few out there who have some very creative ways to fleece you out of your hard-earned money and who may even cost you your home. Be careful but do not let a few bad apples spoil your hopes and dreams.
The next time, we will talk about the various fixed-rate mortgages and how to make them work for you.