Debt Free

Getting a mortgage is fraught with peril. Well, it's not all that bad, but it can cost you substantial money of you're unaware of some common mortgage traps set by some mortgage lenders and brokers. Most mortgage companies and lenders are above board, but, as in any industry, there are some businesses that are a little less than reputable.

#1) “No out of pocket expenses” Be aware of this possible scam. You may indeed pay no out of pocket expenses, but substantial extra fees can still be added to your mortgage. Some of these fees can be perfectly legitimate, but some are unnecessary, and these extras can cost you plenty over the life of the loan. For example, a $1,000.00 fee added to your mortgage principle on a 6.25%, 30 year, fixed mortgage will cost you an additional $1,216.00 in interest payments in addition to the $1,000. Those kind of extras can add up in a hurry. Make sure you look over all the documentation supplied with your prospective new mortgage. Have it looked over by a qualified real estate attorney. The few hundred dollars you'll spend is a good investment, compared to the amount you could spend over the life of the loan.

#2) Affiliated title companies and extra large title insurance fees. These are not always a problem, but you can pay substantially more for title insurance from some companies than others and often, the “some companies” are affiliated with the realty or mortgage company. Shop around for title insurance with reputable title insurance companies and you could save 20% - 40% on your title insurance. The problem lies in the tangled web of prohibited referral fees collected by mortgage companies for directing clients to the title insurance firms.

To effectively skirt laws designed to prevent these type of back room referral deals, many companies are actually affiliated with mortgage companies. Since referral payments to affiliated companies fall neatly through a loophole in the law prohibiting such payments, they're perfectly legal. In any case, almost all of the major cases closed by the U.S. Department of Housing and Urban Development in 2005 involved some sort of shady referral payment deals. Be on the lookout.

#3) Outright mortgage fraud. Use common sense. If it seems too good to be true, it probably is. According to a recent FBI study, 80% of mortgage frauds involved real estate or mortgage industry insiders. As is typical in many fraud or con games, the victim's greed or feeling of hopelessness is used against them. Make sure you don't fall into the trap. Get an appraisal from a qualified, underwriter approved appraiser. Some scams involve getting you into a mortgage that far exceeds the value of your property.

A common fraud is known as “equity stripping”or bailout. In this game, people with financial problems are targeted. In most cases, they are about ½ step away from foreclosure. They're approached with an offer to save their property. The rescue company buys the property for a substantial discount, leases it back to the original homeowner, then sells it back to them at the end of their financial setbacks. This can be legitimate, and a win-win for all involved. There are also legitimate firms that purchase pre-foreclosure properties for small (10 – 15%) discounts off market value, but these are usually outright purchases, with no leaseback.

In the equity stripping fraud, the home is sold at a huge discount to the scammer, then is leased back to the original homeowner for a time. As noted above, this will allow the homeowner to get their head above water. When they are in a financially stronger position, they'll buy the property back, but unlike a similar deal with a legitimate company, in the fraud, the original homeowner doesn't stand much of a chance of ever getting their property back.

What happens is this: The new owner gets a mortgage to cover all the liens on the home and give the original homeowner a bit of cash as a “feel good” measure. After the deal is done, the original, desperate homeowners realize they've actually signed a lease purchase agreement that is much worse than their original mortgage. The perpetrators of the fraud can accomplish this with careful timing. They wait until foreclosure is imminent and the homeowners are exceedingly pressured. At the last second, the homeowners find out the new payments are higher than originally promised. The plan from the beginning is to have the homeowners default on the lease purchase so the scam artists can repossess the home. It is then sold on the open market, and the fraudsters realize a hefty profit.

Make sure your real estate and mortgage company have a proven track record. Most companies are good and honest, but as is the case in most industries, a few bad apples can give an industry a bad name. Use a qualified real estate attorney to examine all mortgage documents. Look at the APR on the disclosure document to see what interest rate you are actually paying, inclusive of all fees.

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There are other tricks to be aware of as well. The fewer options you have when getting a mortgage, common when you've got bad credit, the more likely you are to see sleight of hand from the lender or broker. A mortgage is a huge financial step. Make sure you don't step off the path into a pile of steaming fees.