Whether you are a novice at navigating the housing market or a seasoned veteran, congratulations! Purchasing a home that you can call your own is both an exciting and nerve-wracking step in life. Unless you purchase homes professionally, the homebuying process can be daunting. Because it’s a complicated process involving many steps and the exchanging of money, it is ripe for complications and, unfortunately, even fraud.
There are numerous types of of real estate and mortgage fraud, but in this guide we will focus on the types of fraud that homebuyers are specifically vulnerable to. A lot of home-related fraud information that is widely available is targeted at those who already own a home and those who are trying to sell their home, so we have gathered the research for three major types of fraud that affect homebuyers.
Fraudulent Loan Origination
A mortgage is a special type of loan for potential homebuyers where your lender may repossess your home should you fail to pay off the loan and its interest. There are many factors to consider when shopping for a mortgage, including type and amount of interest rate, the annual percentage rate (APR) and the loan term.
The most important thing to consider however, is your real estate agent or broker, the person who will guide you through your process of finding and purchasing your home. It is imperative that you hire someone you trust, not only because you are investing a lot of money into a place where you will spend much of your life, but also because of a specific type of fraud called fraudulent loan origination.
Fraudulent loan origination is any type of action that results in someone getting approved for a loan that they are not legally qualified for. This can be due to fraud by the lender wherein the lender knowingly approves a loan you are not qualified for, possibly falsifying information in order to receive this result, or due to fraud by borrower, in which case the borrower falsifies information on the loan application.
The number one way to prevent this happening to you is to hire a real estate broker that you trust, that is familiar with lenders, and that can spot the signs of loan fraud. According to the Federal Financial Institutions Examination Council (FFIEC), brokers play a critical role in the loan origination process. Your broker acts on behalf of you, the borrower, and matches your financial needs with a financial institution’s mortgage programs. They perform a majority of the loan processing steps and act as the authority point of contact between you and your mortgage provider. Your broker will receive commission on your loan, usually paid by you, but sometimes paid by the lender when the loan closes.
An example of a fraudulent way a broker can take advantage of you is a situation in which your broker promises to qualify you for a mortgage that is larger than your ability to repay. They may do this to increase their profit with no thought about your well-being. A home is an expensive investment and you are placing the outcome of that investment largely in the hands of your broker; be sure that it is someone experienced, knowledgeable and trustworthy.
There are also ways that you can prevent fraudulent loan origination from happening to you. If you are not using a broker for your mortgage process, follow these tips to avoid this type of fraud:
- Ask friends and family members who have used mortgage lending services they trust. Ask them if their lender described lending terms to them in plain language that they could understand, if their lender gave them the rate that they initially promised, if there were hidden fees that were not disclosed at the beginning and whether or not the lender was responsive to any problems that may have come up.
- Do not be fooled by big institutions that seem trustworthy because of brand name or fancy titles such as “Senior Loan Officer.” Mortgage lenders are salespeople and their primary goal is to get you to lend with them.
- Compare rates from several mortgage lenders, both online and in person.
- Go beyond the basic questions about rates and fees. Ask prospective lenders to see a Good Faith Estimate (GFE) right away, which is a form of basic information about the loan that the lender is legally required to provide you within three days of receiving your loan application. Other specific things to ask about include estimation of closing costs, an explanation of fees and how the lender will earn commission or income off of your loan.
No matter what, it boils down to trust. You must trust whomever is handling your mortgage, so be sure to vet any involved parties thoroughly.
Once you have successfully navigated the mortgage application process, it is time to dive into your search for your perfect home!
During your search, watch out for a form of fraud called illegal flipping. Most people know what house flipping entails; someone buys a house at a low price and sells high, or buys a fixer-upper, fixes it up in a short period of time, and sells the house at a higher value than the amount they purchased it for and invested in it. This is perfectly legal. Illegal flipping looks similar, but the seller sells the house much higher than its appraised value after making very minor improvements to it. Some of these illegal flips occur within the same week, or even the same day.
Again, the most important thing you can do to avoid becoming a victim of illegal flipping is to hire a knowledgeable real estate agent that you trust. For the most elaborate house flipping schemes to work, a corrupt real estate attorney or title agent must be involved to falsify paperwork. Having a real estate agent that you trust can prevent an illegally-flipped house from getting on your list of prospective buys because they would associate with other individuals in their field that only brokered legal deals.
If you are not using a real estate agent, or you simply want to know how to avoid looking at illegally-flipped houses, avoid red flags such as the property only being owned by the seller for a short period of time or the seller being a company ending in “Trust” or “LLC.” Other red flags include the appraisal report only using listings from the same seller, a long list of cosmetic-only property improvements, and the seller only having one spouse on a loan application when the previous owner was a non-borrowing spouse.
If you are interested in a home and you would like to check to see if it is an illegally-flipped home, start by conducting a chain of title search. Even if the seller has provided you with this information, it is beneficial to check it against public record. An illegal flip is transparent if the paperwork you are given doesn’t match public record. The first step to conducting this search is to head to your county’s public access computer terminals, as it is likely that these computers will have better information than a web search from home. Start with running the name of the current property owner to see a list of documents filed underneath that name. Ask your local tax assessor if they keep historical tax information organized by tax account number, which will provide you with which years the property changed hands.
You have gone through all the beginning steps of buying a home, including hiring a buyer’s agent, fixing your credit, getting approval for a loan, choosing the type of mortgage loan that works for you, looking at homes, choosing a home to bid on and best of all, a seller accepting your bid!
This is where wire fraud can potentially create financial catastrophe for you. Wire fraud itself is legally defined as any scheme utilizing false pretenses to obtain money or property via wire transfer, however wire fraud as it affects homebuyers is actually a type of mortgage fraud, just like loan origination fraud. You are most vulnerable to wire fraud when it is close to time to make the deposit on your home. Hackers gain access to your information via public records, multiple-listing services, or your email, and track your negotiations with home sellers.
The most common way they will attempt wire transfer fraud is by creating an email account almost identical to the home seller you are negotiating with and request a wire transfer of your home deposit. If you fall for the scam and send the money, there is no recourse to get your money back. Here are some tips on what to do if you think you have received a scam email:
- Double check that the email is 100 percent correct. Do not click on any links or attachments in unfamiliar emails or emails that are eerily similar to familiar accounts.
- Do not believe what you see without double checking it. Hackers and scam artists can fake anything, from emails to company logos to websites that seem identical to your company’s website.
- How does your real estate agent or seller normally contact you? If it is by phone, you should be wary of sudden email communication.
- If you suspect a scam email, call a phone number you had previous to what the email provided and double check with your real estate agent or seller that it was them who sent it to you.
If your real estate agent is a professional with experience, your likelihood of receiving wire fraud emails is lower, but hackers are devious and it can still happen. Here are some ways to prevent this situation from occurring:
- Never send out any financial information via email.
- Clean out your email regularly so that hackers cannot detect any patterns.
- Change your usernames and passwords on a regular basis.
- Install and update antivirus and firewall programs on your computer.
- Report any fraudulent activity to the FBI via the Internet Crime Complaint Center.
- Request that your mortgage company handle your information through a secured transfer portal.
- Ask your mortgage company and real estate broker to send your personal data in an encrypted file and to text the password to your cell phone.
- Be sure that your company has security software installed on their computers.
- Ask your company who has access to your personal information, and how they delete it once your home purchase is complete.
- Don’t share detailed information about your home purchase on social media.
A Happy Home
Unfortunately, these are just the major ways that fraud can occur in your attempt to purchase a home. There are still numerous methods scammers utilize against current homeowners. However, if you successfully navigate the home buying process and refute any attempts of fraud that scammers direct at you based on the tips here, you have become savvy enough to spot signs of suspicious activity and stamp them out before they harm your finances and your life.
Be sure to do plenty of research on the home buying process itself, what you want in a home, and what your finances will realistically allow for a mortgage. Once you are armed with this knowledge, hire real estate brokers and mortgage brokers that you can develop a trusting relationship with. Knowing that the people who are charged with taking care of a major financial investment and something as personal as the place in which you and your family will live will take a huge weight off of your shoulders.