Most Common Scams
As if it wasn't upsetting enough for a homeowner to find himself in a position where he's facing foreclosure, there are criminals and even actual companies targeting these vulnerable individuals with a number of different foreclosure scams.
If you're going through financial troubles and are exploring your options to avoid foreclosure, it's important to be aware of the most common foreclosure scams. In fact, many of these scammers will reach out to distressed property owners. They obtain your personal information by referencing the public records that are published as pre-foreclosure proceedings get underway. Therefore, you should use extreme caution when dealing with any company or individual who initiates contact.
In addition to the scammers, there are a number of predatory lenders and debt relief companies that target property owners who are facing foreclosure. They charge outrageous fees for doing a shockingly minimal amount of work. Typically, the tasks are things that the average layman could address without assistance. So when working with a service provider who claims to offer help with your finances, debts, and foreclosure, find out precisely what their service entails. If they are vague or hesitant to detail their service offerings, then this should be considered a major red flag.
Before working with any lender, debt relief or foreclosure assistance service provider, be sure to verify the authenticity of their credentials, check with the Better Business Bureau and perform a bit of online research to see if the company or consultant has been implicated in connection with any scams or questionable business practices.
Let's take a look at a few of the most common foreclosure scams and how they work. Once you're aware of these scams, you will be better prepared to protect yourself.
Foreclosure Scams: Equity Skimming
Equity skimming is a rather complicated scam that usually targets homeowners who have a fair amount of equity in their home. The scam typically begins when a so-called real estate investor contacts you, seeking to buy your property. The buyer usually offers to pay off your mortgage, allowing you to walk away from the property free and clear. Some may offer to pay a bit more than what you owe on your mortgage, but it's typically far less than the amount of equity you have in the home.
Here's where things get shady: They usually indicate that they will deal directly with your mortgage company. The real estate investor will instruct you to transfer the property deed and vacate the home. But instead of contacting the mortgage lender and paying off the mortgage, they maintain the home – usually as a rental holding – earning profits from the renters.
If there is no real equity in the home, they will retain the property until the bank finally forecloses.
The problem is that transferring the deed to your home does not transfer the financial obligation. So you still end up with a foreclosure on your credit history, and you'll lose the equity in your home while allowing another person to profit.
In cases where there is a fair amount of equity in the property, they may sell the property to another buyer, “skimming” the equity in the process. If the other buyer fails to perform due diligence, they may lose the property when the bank forecloses. In other cases, they may pay off the mortgage and the sale may be legitimate.
It's important that you're aware of your options when facing foreclosure. Many ethical real estate investors will offer a fair price for your home. Often, these offers are a bit under market value, but they are typically cash offers, with quick closings, and you also save on real estate commissions. If you have equity in your property, you should always work with a legitimate buyer, such as an investor, so you can walk away with at least some of that equity in-pocket as you move forward and work to start over financially.
Foreclosure Scams: Equity Stripping
Equity stripping is another foreclosure scam involving an unethical, predatory mortgage company. The distressed property owner is typically approached by the lender, who offers to give you a new home loan so that you can pay off the original lender who is seeking to foreclose on your home.
But here's where the scam comes into play: the predatory lender will instruct you to overstate your earnings on the home loan application. As a result of the higher income figure, you are approved for a loan that you really shouldn't have received. But the homeowner in this situation is usually desperate and believes this is their best option for saving their home.
Since the homeowner is typically in a relatively bad financial situation, there is a high risk of defaulting on the loan. They are, in essence, banking on the fact that you will likely go into default. When you do, they will quickly move to foreclose, taking your home and the equity in the home. The lender will resell the foreclosed property for more than was owed on the loan, thereby recouping their money and earning a profit – all at your expense.
Due to the nature of this scam, equity stripping scams virtually always target property owners with a lot of equity in the property (meaning the amount owed on the original mortgage is far lower than the home's current market value). Otherwise, there would be no room for profit.
It's important to watch out for red flags, such as being instructed to falsify information on loan documents. If you discover that you were the victim of an equity stripping scam after the pre-foreclosure process has already started, contact a foreclosure lawyer as soon as possible because you may be able to contest the foreclosure thanks to new laws that protect consumers from predatory lenders.
A variation of this scam involves a lender who offers to refinance your home loan with a very low monthly payment. Often, It's interest-only. But these little fees only persist for a short timeframe; at the end of the timetable, you must come up with a large lump sum (called a “balloon payment”) or face foreclosure. Again, this type of predatory lender is banking on the fact that it's very unlikely that a distressed property owner can come up with tens of thousands of dollars in one lump sum.
Foreclosure Scams: Identity Theft
Criminals prey upon vulnerable and often desperate homeowners who are at risk of foreclosure by convincing them to fill out fake loan applications, which ask for their personal information such as banking information, social security number, date of birth and other vital details. Many individuals who are experiencing financial troubles get complacent, assuming that nobody would want to steal their identity. But even if you're facing financial struggles, it's possible that others could still steal your identity and do some serious damage. It's also possible that they may use that sensitive personal information in the future, once your financial issues have been resolved.
Some lending scammers will even approve your loan application (usually, it's a very fast or instantaneous approval, which should serve as a major red flag). They will instruct you to send fees via untraceable or difficult-to-trace methods, such as a money order, cashier's check or wire transfer. Then, they take off with your money.
Some debt relief scammers will also ask for your personal information. But instead of working with your creditors, they simply accept money for service fees while building up a databank of personal information. Most of these scammers do little if anything to provide any benefit to the consumer (typically, any services that are rendered are simple tasks that the customer could have easily performed on their own.) The primary goal is to secure your sensitive personal information.
In short, use extreme caution when working with a lender over the phone or via the internet. Always research the lender and their reputation before providing any personal information. Ideally, you should work only with well-established companies, with a local office where you can meet with an agent in person. That's not to say that all lenders with an office are reputable, but it's far less common for scammers to conduct business in person.
Always trust your gut instinct and beware of companies that use a name or logo that's remarkably similar to a well-known company, this is a common tactic that's used to cultivate trust in consumers.
By educating yourself on the common foreclosure scams and trusting your gut instincts, you can avoid becoming a victim. Remember, if it sounds too good to be true, it usually is.
- How to Keep Your Home by Avoiding Foreclosure
- Getting Help With Foreclosure
- Helping Your Family
- How to Avoid Foreclosures
- The Best Ways to Prevent Foreclosures
- Understand Terms Used in Foreclosures
- Ways Stop Foreclosures
- Working With Your Lender to Stop Foreclosure
- Debt Consolidation
- Home Loans
- Foreclosure Help
- Short Sale Help
- Loan Modification Help
- Foreclosure Law
- Loss Mitigation Training
- Mortgage Rates
- Use a Loan Modification to Stop Foreclosure
- Difference between Fixed and an Adjustable Rate Mortgage
- Prevent Foreclosure with a loan modification
- How can I buy my home back?
- Are you a victim of foreclosure scams?
- Can I Rent My Property If I am in Foreclosure?
- Where to Report Foreclosure Fraud
- Common Foreclosure Scams to Avoid
- If I Can't Refinance During a Foreclosure, What Can I Do?
- Do I get money back if my Foreclosure home sells for more than what's owed?