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Mortgage Scams Are Real in 2021: How To Avoid Them

From false wire payment instructions to fake offers for mortgage relief, we looked into the latest mortgage fraud and closing scams, so you know what precautions to take to protect your money and even your home.

Buying a home is the biggest financial transaction most people make, so it pays to be aware of how scammers might try to steal from you. They're after the cash you've been saving for years for your down payment and closing costs. If you're facing foreclosure, they'll go after your equity and even your house.

Understanding how mortgage fraud and scams work can prevent you from making a little mistake that has huge consequences.

How common are mortgage scams?

Every year, consumers lose millions of dollars to mortgage fraud, wire fraud and other real estate scams. According to the U.S. Federal Bureau of Investigation, more than 13,000 people were victims of internet-enabled real estate crimes in 2020 (PDF) at a cost of more than $213 million. (The FBI combines real estate and rental crimes in the report.)

The U.S. Federal Trade Commission received almost 11,000 reports of mortgage foreclosure relief scams (PDF) and other debt management scams.

How do mortgage scams work?

Mortgage scams can put homebuyers and homeowners at risk when they're buying a home, refinancing or if they're looking for help making mortgage payments. Scammers try to take advantage at every stage, inserting themselves into what would otherwise be a legitimate process.

In some cases, scammers will intercept down payments and closing funds. In other cases, fraudulent companies will take advantage of people facing foreclosure. Criminal mortgage industry insiders such as loan officers, appraisers, mortgage brokers or attorneys can use their specialized knowledge to steal cash and equity from lenders and homeowners — defined as mortgage fraud for profit and prioritized by the FBI.

Types of Mortgage and Closing Scams

The good news is you can protect yourself by understanding the difference between a legal transaction and mortgage fraud or scams. Let's get into the details of the different types of scams, so you know what to look for.

Wire Fraud Phishing Scam

The mortgage closing process for a new home can be an exciting time in the homebuying experience. It's also a big target for scammers because it usually involves a large financial transaction.

In wire fraud phishing scams, scammers who are able to break into real estate company and title company email platforms will often impersonate these companies. They send seemingly legitimate emails to clients who are about to close on their loans, providing instructions about how and where to wire funds.

Victims wire their down payment and closing funds to a fraudulent account that is typically emptied and closed by the time anyone realizes the fraud occurred, the funds never to be seen again.

Protect Yourself From Wire Fraud

Before Wiring Funds

  • Call the title company: Use the phone number from the business website or business card, not from email. Remember that the fraudsters can send emails that look legitimate and change the phone number. Confirm wire instructions by voice.
  • Forward, don't reply to email: Forward messages and manually enter email addresses when you respond. Be sure to check that the email address you enter is correct and matches the address on the company website or a business card. Fraudsters will often make small changes to email addresses that can be easy to miss.
  • Be suspicious of all emailed wire instructions and changes to wire instructions: Title companies rarely change wire instructions. 
  • Review instructions with your financial institution: Your financial institution may be able to identify discrepancies in names, routing numbers and account numbers, and they can check routing numbers and account numbers against past consumer fraud complaints.
  • Create strong passwords: Secure accounts with strong passwords and change passwords frequently. Don't use the same passwords across multiple accounts; consider using a password manager service to help you manage accounts securely.
  • Protect your computer: Install a firewall and keep your antivirus and malware software updated. Have software updates set to automatically install.

When Wiring Funds

  • Use secure, encrypted email or a website portal: Follow title company instructions for using their secure, encrypted email system, or use a secure website portal if that's an option. Mail, overnight delivery service and in-person delivery are also secure, but they could slow the process. In any case, remember your financial information is not secure when sent by regular, unencrypted email.
  • Don't open unexpected email attachments: Even if you think you recognize the sender, an attachment could infect your device with malware.
  • Don't use free Wi-Fi or public computers: Free connections and public computers are easier for scammers to target, and easier for you to unknowingly grant access to future users.

After Wiring Funds

  • Confirm the money was received: Contact the title company within a few hours of wiring the money to make sure the transaction was successful.
  • Report any suspected problems: Contact law enforcement and your financial institution within 24 hours to increase the chances of recovering the money if it was stolen.

Foreclosure Rescue Scams

If you're facing foreclosure, you're in a vulnerable position and the scammers know it. With a quick scan of public records, scammers can target you (PDF), offering to lower your payments, stop the foreclosure process and repair your credit. 

Here are some of the tactics they will try that can cost you your equity and even your home.

Loan Modification Scams

In these scams, fraudulent companies with official sounding names might mail you a solicitation claiming they can help you stop foreclosure immediately and save you money. They charge high up-front fees for services you could easily do yourself, or they don't perform any services at all. 

These scammers also will often advise the homeowner to stop making mortgage payments and cut off communication with the loan servicer. They claim they will take care of negotiating a modification on the homeowner's behalf, while they collect fees and do nothing to help.

If your lender stops receiving payments and communication from you, your window for pursuing help with them may close without you knowing it.

Lease-Back or Repurchase Scams

In a lease-back or repurchase scam fraudulent companies promise to pay off your mortgage if you sign the deed over to an investor. They say you can stay in your home as a renter, and you'll have an option to buy the home back when your financial situation improves. But the new owner doesn't have to sell the property back to you, and they can evict you. According to the FDIC, after you sign away the deed, the property typically changes hands multiple times, and the scammers might take out a new mortgage for hundreds of thousands more than your existing loan.

This nightmare scenario results in homeowners signing away rights to their own property and still being responsible for their mortgage payments.

Bankruptcy Foreclosure Scams

Similar to other scams, bankruptcy foreclosure scams promise to negotiate with your lender on your behalf and stop a foreclosure. The scammer may ask you to sign over your deed while you continue to make payments to the scammer.

The scammer then pockets your money and files for bankruptcy in your name. This does temporarily stop the foreclosure, but if you are unaware of the bankruptcy filing and don't participate in your case, the judge will dismiss it and foreclosure will continue.

This is another scam that could result in you losing your home to foreclosure and having bankruptcy on your credit record.

Equity Stripping

Equity stripping is a way of reducing equity to protect it from creditors. It can be a legitimate tool for homeowners facing foreclosure, but it's also used by predatory lenders to scam people out of their property.

An investor buys property for a discounted price from an owner facing foreclosure, then rents the property back to the owner.

Scammers might try to pressure the owner into a new, higher cost loan. When the owner fails to pay, the bank forecloses on the owner anyway. The owner might also be duped into selling the home to the scammer without knowing it. The new owner can hike up the rent and evict the now-former owner for not making payments.

The scammer can pay off or refinance the mortgage, taking the equity that the owner may have been building for years.

Loan Flipping 

Loan flipping is a type of predatory lending that involves convincing property owners in financial distress to refinance their homes so the lender can collect fees. The homeowner may get some cash in their bank account from the deal, but the net effect is a loss caused by high fees, increased interest rates and prepayment penalties.

Sometimes the scammers will insert a balloon payment that comes due after just a few years of the new mortgage, forcing the homeowner to refinance again or lose their home in a foreclosure. The scammer will offer to refinance the home again for more fees.

Refinancing Scams

Refinancing scams are another type of predatory lending that promise low mortgage rates and fees, targeting emails, phone calls and direct mail at homeowners who are struggling to make payments.

Scammers often collect personal information they say they need to start the process, but they use the information to steal your identity. In other scams, homeowners are told to wire fees or sign over the title of the home to the scammer.

Protect Yourself From Foreclosure Scams

  • Beware of any company calling itself a "mortgage consultant," "foreclosure service," "mortgage rescue service," or other similar name.
  • Beware of any company that contacts you or advertises to you if your home is listed for foreclosure.
  • Never pay fees up front. It's against federal law for mortgage relief service providers to request or receive up-front payment before your lender completes the mortgage modification or other agreement.
  • Don't pay your mortgage payments to anyone but your lender or loan servicer.
  • Don't transfer your property deed or title to anyone unless you intend to sell it to them and give up ownership for good.
  • Keep communicating with your lender or loan servicer. If you want to refinance or modify your loan, contact your lender first.
  • If you need help, work with a counselor approved by the U.S. Department of Housing and Urban Development

Protect Yourself From Predatory Lending

  • Don't sign paperwork you don't understand. If you need assistance, ask for help from other professionals. Check the credentials of attorneys, real estate agents, loan officers and mortgage loan assistance companies.
  • Build a network of trusted advisors you can talk to about the process and get recommendations for professional help.
  • Shop around for fees and interest rates. Question the lender if either of these seem unusually high.
  • Know your credit score and be aware that your credit will affect whether you qualify for a loan. Beware of lenders who say bad credit is not a barrier to qualifying for a loan. It is, and your credit, among other factors, affects the rate you can get.
  • Don't sign any documents with blank spaces that a lender can fill in later with terms you didn't agree to.
  • Never act urgently; if you're being pressured in any way, there is a strong possibility you're being scammed. Always do your homework.

Report Mortgage Scams

If you think you've been the victim of fraud or identity theft, report it to: