Avoid home refinancing scams

Buying a home is one of the most important financial goals for many Californians. It can also be a complicated process to navigate. Scammers often target homebuyers and homeowners because a home may be the largest investment they will ever own. There is a broad range of abusive lending practices designed to take advantage of homeowners. Follow these tips to avoid common mortgage scams.

Mortgage refinancing

Mortgage refinancing is the process of replacing your current mortgage with a new one to take advantage of better interest rates or improved loan terms. This involves paying off the existing loan with a new loan. Refinancing can help lower monthly payments or reduce the total interest paid over the life of the loan. 

Mortgage refinancing scams might involve aggressive sales tactics like threatening the loss of the home to pressure you into accepting unfavorable terms. Spot the red flags:

• Loan flipping – Offers that result in little or no economic benefit to the borrower, but generate additional loan fees, prepayment penalties, or other charges. Be especially cautious if you have a subsidized mortgage. Refinancing may result in the loss of beneficial loan terms or add excessive or hidden fees or undisclosed interest rates into the loan. 
• Equity stripping – Be wary of a “mortgage rescuer” promising to save you from an unaffordable mortgage. Scammers may ask homeowners to sign over the deed in exchange for the ability to continue living in the home as a renter. Meanwhile, these rent payments go toward buying the property back with interest. Of course, if you couldn’t afford the mortgage, you probably can’t afford the rent payments. Once you fall behind, you’re evicted, and the scammer keeps all the equity you worked years to build. Worse, the new homeowner simply re-mortgages the home, cashes out the equity, and skips town while it goes into foreclosure anyway.
• No- or low-cost refinancing – Carefully assess the loan terms. The cost of refinancing may be rolled into the loan, perhaps as a higher interest rate.
• Credit repair refinancing – Talk to a credit counselor before taking any offers to fix your credit through refinancing your home. Don’t allow anyone to pressure you to sign loans you cannot afford or do not understand. Review terms and contracts with a third party such as a licensed lawyer or financial advisor.

Reverse mortgages

A reverse mortgage is a loan that allows homeowners age 62 and older to borrow against the equity in their home. Unlike traditional mortgages, a reverse mortgage makes payments to the borrower as a line of credit, lump sum, or monthly installments. Lenders may use fraudulent sales tactics like not disclosing all terms upfront, such as high origination fees, steep closing costs, or compound interest terms that add accumulated interest back onto the principal sum. Reverse mortgage borrowers are still responsible for paying taxes, homeowner’s insurance, maintenance costs, and other expenses. Additionally, if the homeowner moves out, sells the house, or dies, the loan comes due and must be paid off by them or their heirs. Tips to avoid scams:

• Be cautious of self-proclaimed “senior experts.” Because of widespread fraud, you must have U.S. Department of Housing & Urban Development (HUD) training before securing a reverse mortgage. To find a HUD-approved Home Equity Conversion Mortgage (HECM) counselor near you, call (800) 569-4287.
• Be wary of offers that require the purchase of an annuity or other investment as a condition to obtain a reverse mortgage. If a financial investment is described as “guaranteed” or “low risk,” it’s probably too good to be true. 
• Be especially wary if a friend or romantic interest you met online asks you to take out a reverse mortgage to “help them out” or invest in an “amazing opportunity.” 
• Do not commit to a reverse mortgage until you have explored other income alternatives with a licensed financial counselor or professional. Contact the California Department of Real Estate to learn more.

Mortgage and foreclosure relief

Scammers target distressed homeowners, promising to modify their existing loan or stop the foreclosure. They find potential victims listed in public foreclosure records. While there are legitimate services and charities that help homeowners struggling to pay their mortgage, be wary of these:

• Any business that demands you pay them before services are provided. Look up the company with the Better Business Bureau and investigate the company’s website and online reviews.
• Requests for the deed to your house for any reason, whether it is to take care of your credit or obtain new financing. Do not sign it over without independent professional review and advice. 
• Sales professionals who rush you to make decisions, do not answer all your questions, or ask you to sign a form that contains blank spaces that can be filled in later. 

Additional resources

• Protect Yourself from Fraud Booklet – We’re here to help you make well-informed financial decisions. Seek licensed professional help if you are concerned about your current mortgage or foreclosure.
• Homeowner Bill of Rights – Check out this set of California laws that provide protections to homeowners.