Checklist for Verifying a Mortgage Lender’s Legitimacy

Fraudulent mortgage lenders are on the rise these days, owing to the economic crisis bought by COVID-19. Although they have been around for a while now, their tactics are evolving in accordance with whatever’s the current situation. If you’ve never bought a home before, you’d make an appealing target.

But thanks to the internet, avoiding scams has become considerably easier. Just look up a company’s name on Google, and you’d know whether they’re legitimate right away. But what if the person who approached you is a broker? Since they’re not the lender, they can fake their identities and even have a legitimate-looking profile on the internet.

The most common tactic scammers use is offering you something too good to be true. They may work similarly as an investment scammer, who would claim that your $1,000 today will become $5,000 in a month. They’d explain how that’s possible, using financial jargon that makes them sound like they truly know what they’re doing — but they’re just manipulating you.

Sometimes, they may act aggressively so that you’d be pressured to sign a contract with them at the moment. To avoid their traps, note the following tips:

1. Know Your Mortgage Lenders and Brokers

As soon as the goal of buying a home gets formed inside your head, look up legitimate mortgage brokers and lenders on the internet. A mortgage broker is an intermediary who pairs borrowers up with a mortgage lender. They ensure that you’d end up with a lender with the most fitting terms for you.

Don’t confuse a mortgage broker with a mortgage banker. The latter closes and funds a mortgage with its own funds. Brokers earn commissions, a.k.a. origination fees, which are based on the size of the loan. They may work independently, or as an employee of a mortgage brokerage firm.

Mortgage lenders are of course the companies that lend you cash to buy a home with. You can see all the legitimate lenders by doing a quick Google search. Banks also act as mortgage lenders. If you’re unsure which lender to choose, that’s a good reason to work with a broker.

2. Know How Brokers Work

If you choose to work with a broker, expect the following from them:

  • Ask for your financial information, such as your income, assets, and proof of employment.
  • Ask for your credit report, a document that will determine your chances of being approved for a loan.
  • Determine an appropriate loan amount, loan-to-value (LTV) ratio, and your ideal loan type.
  • Submit all your documents to a matching lender.
  • Guide you through the closing of the loan.

After the process, the broker will collect their commission from the lender. You may also pay a part of that fee in the closing statement. Note that the broker should only get paid after the mortgage process is completed. If they demand a commission from you before or in the middle of the process, consider that a red flag.

mortgage lender

3. Read Reviews About Lenders

Scammers don’t come unprepared; they may have documents, licenses, and certifications to show to convince you that they are legitimate. If your suspicion remains, contact the Better Business Bureau, and check out the reviews about the supposed lender.

legitimate lender should be registered with state agencies. You can ask an attorney’s help if you don’t know how to confirm a lender’s registration. Once you’ve received word that the lender in question is illegitimate, file a report.

4. Be Aware of the Common Mortgage Scams

Again, the most common scam is a deal that’s too good to be true. But what exactly is that? If a lender or a broker exercises the following, consider them red flags:

  • Not accounting for your ability to repay the loan
  • Denying you the option to reduce your interest rate through the purchase of points
  • Charging excessive loan costs (legitimate costs shouldn’t exceed 2% to 5% of the loan amount)
  • Charging prepayment penalties
  • Not disclosing how they’re paid
  • Claiming that bad credit doesn’t matter
  • Charging balloon payments
  • Inflating your income or the home’s value
  • Not providing a good faith estimate
  • Charge fees different from the good faith estimate

Researching is key to determining the validity of a lender’s or a broker’s claims. Don’t fall for their tactics without doing a quick Google search, or consulting an expert, like a lawyer or a real estate agent.

5. Refer to Official Associations

Despite the existing laws against mortgage scammers, they’re still persistent and ever-growing. To protect yourself further, refer to the websites of the Mortgage Brokers Association and the National Association of Mortgage Brokers. They have a code of conduct and best practices that are peer monitored. If a lender or a broker breaks the conduct, back off and report them to the authorities.

For every scammer you put behind bars, you help save thousands of unsuspecting and vulnerable borrowers.

Share this post:
Scroll to Top