What is a "Reverse Mortgage?"

Also known as a Home Equity Conversion Mortgage (HECM)a reverse mortgage,is a popular way older homeowners (62+) can convert part of the equity in their homes into tax-free income without having to sell the home, give up title, or take on a new monthly mortgage payments.

Before explaining a reverse mortgage, let's review the features of a Standard Mortgage:

With a standard loan or mortgage, your income stream is used to 'qualify' for the mortgage or loan. The lender will want to see that you have enough cash flow from your job and other sources of income in order to make the payments.

By securing this loan or mortgage against your house, the bank has extra security. After all, if you stop paying, they can take away your house.

As the years go by and you continue to make the payments, you will build up 'equity', which is the difference between what your house is worth, and how much you owe on the loan or mortgage What you owe will be continually reducing as you pay off the principal.

A Reverse Mortgage ... Reverses The Process:

A reverse mortgage, in contrast, requires no proof of income, no credit checks etc.. You simply have to own the home you are borrowing against.

The reason for this is that interest payments are 'rolled up' on the reverse mortgage - i.e they are added to the loan, and not repaid monthly.

Over time, of course, this starts to eat up your equity, because as each interest payment is added to the loan, interest starts being charged on the previous interest too!

Who Would Benefit From A Reverse Mortgage?

Older homeowners (62+), who struggle on limited pensions are usually living in properties that have soared in value in recent years. With reverse mortgages they can unlock some of the value in their homes and remain in the property at the same time, thus enhancing their retirement years.

These reverse mortgages are becoming more popular with seniors.

Paying Back The Loan

There are NO monthly payments due on a reverse mortgage while it is outstanding. The mortgage/loan is repaid when the homeowners cease to occupy the home as a principal residence, whether the homeowner (the last remaining spouse, in cases of couples) passes away, sells the home, or permanently moves out.

Depending on the size of the loan and the current real estate market conditions, there may actually be no equity left when the loan is finally repaid. If the debt comes to exceed the value of the property, the FHA or the lender takes the loss.

As well, loans under these programs are without recourse. This means that lenders can not attach other assets of borrowers or their heirs in the event that the reverse mortgage debt exceeds the property value.

On a another note, if the home is sold and the sales proceeds exceed the amount owed on the reverse mortgage, the excess money goes to you or your estate.

There will always be some concern with homeowners who would like to leave an inheritance for their children and the home is to be that cash inheritance.

Note:

As with all loans, be careful not to default on regular or common charges, such as property tax, insurance, utilities etc, as these could all lead to the loan/mortgage being reclaimed early (foreclosed).

Typically, the lender will have an option built in to the contract to increase your debt by paying these charges on your behalf, should you default, and this is not an option you want them to exercise, as you will then start paying interest on those charges too!

Reverse mortgages can be very useful, but treat carefully as they can also have a sting in their tail.

Keep an eye on the outstanding balance every month, versus the value of your home for peace of mind.

Whether you are planning to purchase a home for the first time or refinance an existing mortgage, plan on comparing lending companies before you accept a financing offer if you have adverse credit history. Sub prime lenders specialize in offering loans to people who have a high-risk credit history. In return for accepting this risk, they charge higher rates and fees.

But not all sub prime lending companies offer competitive rates. Lenders can stack fees into the loan or charge excessively high interest rates, so it is best to compare financing offers.

Check Online

Mortgage websites offer a convenient and competitive way to gather financing quotes. Through such websites, lending companies know they are in direct competition with others, so they offer their best quote. You can also complete your loan application online once you have chosen a competitive offer.

Compare Rates

Interest rates can vary a couple of percents between lending companies. Over the lifetime of your loan that can add up to thousands of dollars. When comparing rates, make sure that you gave out the same information. Differences in loan amount, down payment, and income level affect rates.

Look At The Fees

Fees should be included in the price of the loan when you are comparing prices. Adverse credit will result in some fees, but they should not be excessive. You should expect to pay up to five points for most loans. There are always exceptions to this rule, but comparison shopping should give you an idea of what is reasonable.

Details Count

Once you have a competitive financing offer, be sure to read the terms. Some lending companies charge high fees for late or missed payments. While late fees are common, they should not be extreme. If you have any questions, contact the lending company and they will answer your questions.

Include A Down Payment

A down payment between 5% and 20% is usually required for people with a credit score less than 600. If you provided a down payment larger than the minimum, you can often get a better offer. In addition, a down payment of 20% or more will save you from the expense of PMI.

A capped mortgage is a variable rate mortgage with a capped limit beyond which the rate paid will not exceed.

Mortgages are available in a number of different interest rate options, one of which is the capped rate.

A cap means that there will be a limit to any increase in the variable rates for a selected term. The mortgage rate charged on your account can not exceed this rate. However if the variable rate drops below your capped rate you will benefit, as your repayments will be calculated using the lower variable rate. Capped mortgages enable you to place a limit on your monthly mortgage commitments and still benefit from falls in interest rates.

Capped rate mortgages put a limit on the highest rate of interest you will have to pay on your mortgage over an agreed introductory period. This means you're protected to a certain extent if interest rates rise, and if they stay low you will still benefit from the lower interest rates. It's basically a combination of the fixed rate mortgage concept with a standard variable rate mortgage, allowing you to profit from decreasing interest rates.

A capped rate mortgage is a variable rate mortgage which has a fixed upper rate limit. This means that the borrower knows in advance the highest monthly payment that he may have to make.

One advantage of the capped rate mortgage is that when interest rates are likely to rise, they offer protection for borrowers against repayments going over a certain level. This can be seen as being almost as attractive as a fixed rate mortgage. Having a capped rate mortgage can make it easier to budget when you know what the highest amount your mortgage payment could be.

Be aware that this type of mortgage usually charges redemption penalties to those who wish to swap mortgage provider.

Capped rate mortgages are generally a compromise between fixed rate and variable rate mortgages.

Whilst providing peace of mind capped rates are generally more expensive than fixed or discounted rate products.

As the term implies, with a fixed rate mortgage the mortgage rate is fixed for a set period of time, so no matter what movements occur in the lender's standard variable mortgage rate, the borrower's arrangement is fixed and, therefore, so are the monthly fixed rate mortgage payments.

A fixed rate mortgage would suit someone who likes to know where they stand. A fixed rate mortgage, as suggested by the name, is a mortgage where equal repayments are made every month.

Fixed rate mortgages allow you to easily manage and plan your monthly expenditure - because the payment will be the same every month and you won't be affected by any rises in the base rate. If the interest rates rise above the fixed rate on your mortgage, you will see the real benefits of the fixed rate mortgage.

A fixed rate mortgage makes it easy to plan ahead, because as the name suggests, the interest rate on your mortgage stays fixed.

This means that as a fixed rate mortgage customer, even if the Bank of England Base Rate changes, the interest rate on your mortgage remains constant over a fixed period of time. This makes your budgeting easier, because you can plan ahead knowing exactly how much your monthly repayments will be.

The fixed rate period can be anything between six months and five years, but it's always best to refer to a financial services professional before deciding what period of fixed interest rate to choose.

The biggest advantage of a fixed rate is that irrespective of fluctuations in interest rates, your monthly repayments remain the same throughout the period of the fixed rate - usually six months to five years.

A fixed rate mortgage is suitable if your mortgage repayments take up a large proportion of your income as it protects you from rises in interest rates. However, you would not benefit from any reduction in the lenders standard variable rate.

Fixed rate mortgages generally incur a penalty if redeemed within the fixed rate period.

The advantage of a fixed rate mortgage is that you know exactly how much your mortgage will cost, and for how long. If interest rates on your mortgage rise, well the fixed rate will not. Conversely, however, when mortgage rates drop, your fixed rate mortgage will not drop with them.

The key benefit of a fixed rate mortgage is that you are able to accurately budget your repayments for a set period of time. In addition, fixed rate mortgages are an excellent option, if it becomes apparent that interest rates may be rising over the coming years, as you can protect your mortgage repayments against rises by choosing a fixed rate mortgage.

Self-employed mortgages, as the term implies are mortgages designed for those that are self-employed. Traditionally it's been more difficult for the self-employed to get mortgages.

Mortgage lenders preferred to see the regular income guaranteed by employment. However this has changed in recent years. There are now mortgage lenders who specialise in the self-employed market.

If you are self-employed or unable to prove your income, it can be difficult finding a suitable mortgage. There are a number of reasons why it is often more difficult for those in such situations, the main ones are that the income of the person tends to fluctuate, and they are unable to prove their income like those regularly employed who can produce payslips.

Self-employed people may experience a problem finding a mortgage. Those in standard full-time employment are basically guaranteed to be paid, and can get references from their employer as well as be able to show their payslips therefore proving their income. Mortgage lenders like this as it cuts down their risks.

If you are self-employed or working on a short-term contract, you could be financially solvent, and able to keep up payments easily, but that doesn't make it easy for you to prove that you will keep up payments to your mortgage lender. They want to know that that you will be able to keep up payments for a full term, usually 25 years, not just over the next year.

If you have no proof of income because you are self-employed and do not have three years worth of accounts it is unlikely that any high street mortgage lender will offer you a mortgage.

Being self-employed , and not having a regular or provable income needn't prevent you from getting the mortgage that you need, there are specialist lenders in the market who offer mortgages for these circumstances.

There are lenders that will offer you a mortgage on basis that you self certify your income, nevertheless, you'd still need to have a sizeable deposit to put down to lessen the lenders risk. For this deposit of 15-20% the lenders do not check employment records or ask for your accountant to clarify your earnings.

Mortgage lenders will want to see three years audited accounts from a certified accountant before they consider a mortgage for the self-employed. If you do not have three years accounts you may be able to get a self-certification mortgage by declaring your income. You have to provide a certificate from your accountant for your last few years' mortgage statements.

Some specialist mortgage lenders have targeted the self-employment mortgage market by providing some solutions that offer a more flexible approach to match the working pattern of someone who is self-employed. This means that they accept that when you are self-employed you may enjoy periods of high income but you may also suffer from periods of low income. Your mortgage should reflect that, enabling you to overpay and underpay when you need.

Those with a reasonable amount of deposit but unable to show their true earnings would suit this type of mortgage.

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Just as there are many types of mortgages and mortgage deals to choose from, there are also many sources where you can go to get a mortgage. Your key choices are to use a mortgage broker, a more general financial adviser, or shop around yourself and go direct to the mortgage lender. For many people, choosing a lender means finding a mortgage company offering the lowest APR rate.

If you decide to use an adviser you can choose between a specialist mortgage broker and a general financial adviser. A general adviser will look at all your financial affairs if you want, not just your mortgage. As opposed to lenders who can only offer their own products, an adviser can look at the whole market for you and consider mortgages from a number of lenders. Advisers can also offer you advice and information tailored to your needs. In the UK, All firms or Individuals arranging or advising on mortgages must be authorised to do so by the Financial Services Authority (FSA). If you are unhappy with advice from an authorised firm you usually have the right to complain and may be able to claim compensation.

As an alternative to using a financial adviser, you can arrange a mortgage directly with a lender - like a building society, bank or specialist mortgage company. A lender will only recommend their own mortgage products although they may have several you can choose from.

When choosing a lender, you should consider the competitiveness of the lender's rates, their fees and penalties, their customer service and their reputation. You'll also want a lender you can trust, and someone you can work with effectively. Remember you'll have to deal with this company for many years to come.

1. Building Societies
Building societies are mortgage experts, they offer specialist advice and they usually offer very competitive rates. Many national ones have a branch in most major towns and cities while the smaller ones tend to specialise in catering for home buyers in particular areas. For example, the Cambridge Building Society specializes in helping people who live in Cambridgeshire.

2. High Street Banks
Banks usually have years of lending experience and they have more branches and greater coverage across the United Kingdom. Their standard rates tend to be higher than those of building societies but they often offer the best introductory offers on mortgage deals. Some of the big banks now have special arrangements with building societies where the building society is the one that handles all the mortgage business for the bank.

3. Specialist Mortgage Lending Companies
Specialist lenders lend to a particular type of niche market. Many of these specialise in providing mortgages for people in special circumstances who would not normally be offered a loan by their bank or building society. This includes people with adverse credit, the self-employed, part-time employed and those purchasing overseas properties. Many mainstream lenders have established specialist subsidiaries for non-standard mortgages such as these. You may have to deal with them over the phone, by mail or over the internet as most of them do not have a wide network of branches across the country.

4. Insurance Companies
Some insurance companies offer mortgages and other financial products together with their range of insurance products. They may sometimes offer certain deals in association with other financial institutions such as banks but they do not specialise in this area and they may not necessarily offer the best rates.

5. Intermediaries and Mortgage Brokers
Instead of going directly to the lender for a mortgage, you can approach an advisor or broker to search the market for the best mortgage deal for you. Some intermediaries are tied to particular lenders and they may only offer products from their lender. Others are independent so they have a much wider market to choose from. A credit broker is a firm or person who introduces you to a lender for the purpose of borrowing money. The task of the credit broker is to obtain the loan you require on terms that are acceptable to you.

Sub-prime mortgages are not that much different from average mortgages. They have interest rates, points, and fees. They can be compared online, and they have seasonal trends. The only real difference is that as a borrower with a less than stellar credit record, you will have to pay a slightly higher rate for the lender's increased risk. What is important is that you prepare yourself with information about sub-prime mortgages and compare lending companies to make sure you get the best deal.

Paying For Risk

If you have bad credit or declared bankruptcy, a mortgage lender is taking a big risk that you will pay back the loan. People with bad credit are seven times more likely to default on loans, so lenders make up for this loss with higher interest rates and fees. However, some companies take advantage of people with poor credit, so you should compare companies.

Look Online

You don't have to meet with a lender face to face to negotiate a mortgage loan. You can go online and compare financing packages from multiple bidders by supplying some personal information. Rates and fees are different between lending companies, so it pays to shop.

The Mortgage Season

Fees and terms can be better during the off-season of fall and winter for borrowers. When there is more competition for fewer loans, mortgage lenders will lower their fees. If you do secure a mortgage during the spring or summer, double-check fees to make sure they are not inflated.

Down Payments Wanted

A down payment is often necessary for a person with a bad credit record. The larger your down payment, the easier it is for you to secure a loan. You can also avoid PMI by putting down at least 20% of the home's value.

Fees Add Up

Interest rates are an easy way to look at a loan, but you should also consider the fees involved in a sub-prime mortgage. Some fees are to be expected to process the loan, but others can be excessive. When you get a mortgage offer, be sure to add up the fees from each financing package and compare those with the interest rates.

Why You Need a Bridge Loan

You have to move fast in today's housing market if you want to get into the home of your dreams. In cities such as Seattle or San Francisco it's not uncommon for a buyer to receive half a dozen offers within the first day or two after putting the house on the market.

Unless you have enough excess income to buy a second home without selling your current abode, you will have to play the timing game; finding a home to purchase while finding a buyer for your own. This can be especially sticky if you are buying in an area with a hotter market than the one you're leaving. Most sellers won't be willing to accept 'contingent' offers (you buying their home is 'contingent' on you selling your home) because of the overwhelming demand in the area manifest by the numerous potential buyers beating down their door.

Under these competitive conditions, a bridge loan may be just what you need to avoid missing out on a time sensitive real estate purchase. Not sure how to go about securing a bridge loan? Eventually you'll go through a bank or private lender to get a bridge loan, but it pays to know the basics before you set foot into the local loan office.

Bridge Loan Basics

Strictly defined, a bridge loan is a form of second trust that is collateralized by your present home in a manner that allows the proceeds to be used for closing on a new house before the old house is sold.

The fact that you are not immediately required to sell your old home makes a bridge loan the logical solution for people in relatively cold markets who need to act quickly in order to close on a new home.

Most people who get a bridge loan will use the extra cash to pay off the mortgage on the old home, deduct any closing costs and prepaid interest, and put the remainder towards a down payment on the new home.

A bridge loan entails substantial risk for the lender because the old home may not sell for some time. Therefore, you can expect relatively high interest rates and short terms of six months to a year. The borrower usually begins making interest payments after the end of the term if the old house still hasn't sold.

After the old home sells, the bridge loan is paid off. If the house sells within the term limit, all unearned interest is credited back to the borrower.

Get Professional Bridge Loan Advice

Before you sign on any dotted lines, make sure the lender you're working with has taken all the time you need to explain bridge loan details to your satisfaction. Depending on your individual situation, securing a bridge loan can be somewhat complicated. Having a relationship of trust with your lender can help simplify the process.

Fixed Rate Mortgages: These loans have a fixed rate of interest over the entire term for which the loan has been disbursed. The term for these mortgages is typically between 10 to 30 years. The monthly interest payment on these loans is fixed and hence there exists a certainty about the repayment of the debt over the entire term of the debt. Another advantage of fixed rate mortgages is that the initial down payment required is very low, generally around 5% of the loan amount to be disbursed.

The disadvantage of this type of loan is that the rate of interest may be higher than that of a variable rate mortgage. If predictability of the interest payments is important, then it is advisable to consider securing a fixed rate mortgage.

Adjustable Rate Mortgages (ARM): As the name indicates, the interest rate on this type of mortgage fluctuates throughout the term of the loan depending on the interest rate scenario in the economy. The rate for an ARM is usually adjusted annually.

An ARM usually has caps, which restrict the rise in the rate to a certain level, both on an annual basis as well as over the entire term of the loan. For example, an ARM may have a cap of 1% every year and 5% over the term of the loan. This type of loan is best if the term of the loan is short, as the longer the term, the more the exposure to fluctuations in the interest rate. The index to which the variable rate is pegged should also be carefully considered.

Thus a variable rate mortgage can work out to be a cheaper option than a fixed rate mortgage, provided the borrower has given due attention to the risks involved.

Jumbo Loans: If the equity loan to be raised exceeds the federal guidelines set by Fannie Mae/Freddie Mac, then the loan is referred to as a jumbo loan. The limit set by the guidelines is different from state to state. The rates for jumbo loans are typically higher than those for other types of mortgages, as the lender has a higher risk due to the larger amount of the loan. The borrower should try not to exceed the guidelines, as this could mean a considerable savings in terms of interest outflows.

In other words, the benefit of the loan must outlast the loan period. Taking a loan for financing that elusive vacation is a strict no-no. Moreover, home equity loans must also never be taken for day-to-day expenditures. This option should be saved for emergency needs only.

When applying for a home loan, all credentials of the lender must be keenly checked. The local consumer protection agency could be contacted for providing a list of lenders with an honest repute. All fine print must be carefully scrutinized, and one must avoid signing documents without having read them or which have blank spaces in them. Moreover, it is also advisable to keep a copy of all documents for future references.

Avoid the temptation of applying for a home equity loan wherein your monthly income is inadequate to finance your debt obligations. In such an eventuality, the lender can foreclose on your home because of a default. Hence never let your greed overtake sound common sense when applying for that home equity loan.

A home equity loan is normally a second mortgage. Hence one must carefully take stock of one's financial conditions and analyze whether one can afford extra debt. This is because once a home equity loan is undertaken, loan repayments must be made a top priority, as it is your home that could be taken away from you in the event of a default.

Moreover, one needs to maintain a good credit record, as banks that have advanced you credit can freeze your credit limits in case your credit record takes a turn for the worse.

Having said this, it does not in any case deny the fact that home equity loan products are indeed very attractive.

Refinancing your debt via a home equity loan shifts your debts loan to your home. The flip side to such a move is that your home is on the line. However, tax deductions on interest repayments make it an attractive proposition. Moreover, in such a case of loan consolidation, it makes financial sense to go for a fixed term equity loan.

Newer products such as adjustable rate mortgages, wherein borrowers do not have to restrict themselves to a fixed home equity loan or a home equity line of credit, are hitting the market. One can take a home equity loan wherein the loan remains fixed for the initial period (at the discretion of the borrower), and after the period elapses, converts itself into a line of credit. Borrowers of these kinds of loans are normally individuals who are concerned about rising interest rates and yet want to keep their financing costs at a reasonable minimum. The only downside to this hybrid structure is that interest is charged on the entire lump sum as opposed to a plain vanilla home equity line of credit.

One of the many reasons that home equity loan products have become such a rage in recent times is because of the low interest rates. However, all that glitters is not necessarily gold. Borrowers need to read the fine print carefully before burdening themselves with a home loan to pay off credit card bills. One, not only are they converting short-term debt into long-term debt, but two, most home equity loans are not for financing that expensive vacation, but meant for something more long-lasting.

Interest rates on home mortgages are often quoted with and without points. A point equals one percent of the amount you are financing. This means that on a $150,000 mortgage, one point is $1500.00 and two points would be $3,000. These points are in addition to whatever other closing costs you might have.

I checked interest rates today in our state for 30-year fixed-rate mortgages and found a number of companies offering mortgages with no points. Here are a few examples (payment and interest only - no taxes or insurance).

0 Points 5.625 percent interest, $863 per month payment

0 Points, 5.750 percent interest, $875 per month payment

0 Points, 6.250 percent interesxt, $924 per month payment

Now, let's compare these with mortgages requiring points.

1 Point, 5.250 percent interest rate, $826 per month payment

2 Points 5.0 percent interest rate, $805 per month payment

2 Points, 5.125 percent interest rate, $817 per month payment

What this makes clear is that there is an inverse ratio between the number of points charged by the lender and the interest rate on the mortgage. In other words, the more points you pay, the less your interest rate will be. This means that when you pay points you are basically buying down your interest rate and, thus, your monthly payment. In fact, one point is usually equal to ¼ percent in the interest rate. So, as you can see from these charts, paying two points on a 30-year fixed-rate mortgage could save you as much as $50 a month or $600 a year.

So doesn't it make sense to always pay points?

Not necessarily.

The important thing in deciding whether or not to pay points is the number of years you intend to stay in that house before you either refinance or buy another. Do the math and you will see that the longer you intend to stay in that house, the more sense it makes to pay points.

Let's go back to that two point example where the interest rate is an even five percent and the monthy payment $805. If your best deal in a no-points mortgage is 5.625 percent, yielding a payment of $863, then paying two points will save you $58 a month or $696.00 a year.

However, you must remember that on a $150,000 mortgage, two points equals $3,000. So you would need to say in that house for almost 4.5 years in order to just break even on the cost of the points.

So in answer to the question, should you pay points, the answer is a a strong maybe. If you intend to stay in the same house for seven or ten years, the answer is probably "yes." If you believe you will refinance or sell the home in less than four years, the answer is that you will be money ahead to skip the points and pay the higher interest rate.

The idea of getting a home equity loan while interest rates are low to help you pay off your bills, buy a car, or even pay for your child's education may seem like a great idea. However, you should educate yourself first so you know exactly what a home equity loan is and if it is really right for you.

The basic idea of a home equity loan is that you can borrow against the current equity in your home, so the more equity you have the larger home equity loan you can receive. In essence, to receive a home equity loan you are using your home as collateral, or the basis, for the home equity loan. If you do not pay the home equity loan back, then your home is at stake and may be foreclosed upon. This is sobering news many people are not aware of, so getting a home equity loan requires some thought and the ability to repay the home equity loan as well.

However, you might be reading this and actually interested in a home equity loan, but have no idea what equity is or if you have any. Equity is how much of your home you have paid for. So, you take the home's current value and subtract it from the amount you still owe, and that is how much equity you have in your home and what will ultimately be used to approve or deny your home equity loan application. For example, your home is currently worth $400,000 and you have $280,000 left to pay on your mortgage. Your current equity is $120,000.

You will need to know all of this information before you apply for a home equity loan to know if you have enough equity to even apply for a home equity loan. Plus, the more you know about applying for and negotiating rates for a home equity loan the better deal you will receive. Remember, knowledge is power and the more home equity loan knowledge you have the more powerful you will be able to negotiate.

Legitimate sub-prime lenders provide a needed service to many wishing to buy a home. By offering financing to those with adverse credit, sub-prime lenders offer a valuable financing options. However, predatory lenders take advantage of people with poor credit by charging excessive fees, forcing foreclosures, or demanding titles. To protect yourself in your home loan search, avoid these common mortgage scams.
Excessive Interest Rates And Fees
Predatory loans require a borrower to pay excessive upfront costs or high fees. Some state laws protect consumers by putting caps on interest rates or fees. If you have bad credit, you should be paying no more than 8% higher than a conventional loan. Limits on closing costs vary, but anything more than five points should be viewed suspiciously.
Forcing Foreclosures
Another lending scam involves lending to people so they will be forced into foreclosures. These types of loans typically have monthly payments so high, you can't possibly pay them. They lure people in by promising guarantee approval or cashing out your equity, but they charge high interest rates. Before you sign a loan, be sure you can afford the monthly payments.
Demanding Title
A growing scam involves supposedly refinancing your mortgage, but in reality they scammer is pocketing your cash and title. There are many variations on this scam, but usually these con-artists will solicit those who have liens against their property or received a foreclosure notice. They make a promise of solving all your financial problems if you turn over your title and pay an up front fee.
The scammer will then file for bankruptcy in your name that will be dismissed since a third party initiated the process, but it will still leave a mark on your credit report. The scammer will also take mortgage payments from you, even though they didn't pay off the first mortgage. In the end you may lose your house.
Protect Yourself
Protect yourself from these scams by being a savvy shopper. Request quotes from several lenders before picking one. If you have any questions, talk with the lending company. Legitimate lenders will be happy to explain the process and answer any of your questions.
Once you pick a lender, be sure you read all forms before you sign the paperwork. According to federal law, you have three days to cancel your mortgage after settlement. You will also be refunded all fees, except the application fee.

Red flags are indicators that there may be a current or future problem with the borrower or transaction. They help Underwriters isolate pertinent issues that are part of the overall loan evaluation. They are questionable items, and when there are several, they usually indicate that something is "amiss" and should be investigated further. Lenders, who have done extensive research on loans that they found to be fraudulent, found one consistent pattern in all of the files; the Underwriter did not feel totally comfortable with the file and had asked questions about certain items. However, in every case, they had not gone far enough. They had stopped "one question short."
The following sections contain a representative list of "red flags" in the loan package that may alert the Underwriter to possible irregularities in the data submitted by a borrower. The main purpose is to point out typical inconsistencies that have been found in fraudulently-obtained loans. It should be emphasized that the presence of one or more of these items is not necessarily indicative of fraud. They do, however, point out the need for additional review and documentation. These items may be seemingly legitimate when viewed separately, but when aggregated, a pattern of deception may begin to emerge.
Rules for Detecting Fraud:
The general rules for detecting fraud are simple:
* Use common sense. Does the loan file make sense? e.g., Is the commute from home to work reasonable? Why does a stock broker not own any stock himself?
* Go beyond the numbers. Aside from ratios, are all the parts of the borrower's financial picture consistent? e.g., income vs. savings vs. liabilities?
* Check document consistency. Is the information the same throughout the file? e.g., application vs. credit report vs. VOE vs. VOD?
* Trust your intuition. Why don't I feel comfortable? What questions must be answered to complete the package? Follow your instincts, but use good judgment and keep an open mind. Ask for letters of explanation and read them.
SALES CONTRACT
* Seller is realtor, employer, or relative of borrower (non-arm's length transaction).
* Power of attorney is used.
* Sale is subject to seller acquiring title.
* Buyer is required to use a specific lender or broker.
* Odd amounts used as earnest money.
* Secondary financing is offered by seller or other parties.
* For sale by Owner (FSBO). No real estate agent involvement.
* Real estate agent listed but no signature.
* Assignment of contract ("...and/or assignees") or borrower not listed as purchaser.
* Earnest money held by seller or third party other than the title/escrow company.
* Large seller credits (over 3-4%) or personal property included.
* Contract is "stale dated" (in excess of 2-3 months old).
PRELIMINARY TITLE REPORT
* Income tax or judgments against borrower on a refinance.
* Delinquent property taxes.
* Notice of default recorded.
* Seller not on title.
* Modification agreement on existing loan(s).
* Seller owned property for short time with cash out on sale.
* Buyer has pre-existing financial interest in property.
* Borrower not appearing as currently vested on refinance.
APPRAISAL
* "For Sale " sign in the photos of the subject on a refinance.
* Occupant noted as "tenant" or "unknown" for owner-occupied refinances.
* "For Rent" sign in the photos of the subject on a owner-occupied refinance.
* Appraised value lower than purchase price.
* Property recently listed for sale.
* Market rent significantly less than amount indicated on lease agreement.
Because Preferred often uses in-house Appraisers, our exposure to fraud due to the actual appraisal is limited. However, in reviewing "fee" or "WIC" (Preferred Independent Contractor) appraisals the following red flags in addition to some of those already mentioned should be noted:
* Comparables are more than one mile from subject property (except for rural properties).
* Comparables are all adjusted in the same direction.
* Line adjustments are in excess of 10%.
* Overall adjustments are in excess of 25%.
* Photographs do not match description.
* Sales contract is dated after appraisal.
* Appraisal ordered by a party to the transaction (buyer, seller, realtor, etc.).
APPLICATION
* Significant increase or unrealistic change in commute distance.
* Number of family members compared to size of house being purchased not realistic.
* Date of application and dates of verification forms not consistent.
* Borrower's age and number of years employed not consistent.
* Lack of accumulation of assets compared to income.
* Years of school not consistent with profession.
* Buyer is downgrading from larger to smaller house.
* Buyer currently lives in property; purchasing from landlord.
* High income borrower with little or no personal property.
* Significant increase in housing expense.
* Down payment other than cash.
* Stock, bonds (liquid assets) not publicly traded.
* "Acquisition information" left incomplete; price and date purchased not indicated.
* Borrower holds stock in employer (may be self-employed).
* Inappropriate income with respect to amount of loan.
* Significant or contradictory changes, cross outs, or write overs on handwritten application to typed application.
* No bank accounts - all liquid assets held as "cash on hand."
* Portion of liquid assets held in bank accounts and some as "cash on hand."
* Invalid Social Security number.
SOCIAL SECURITY NUMBERS
Social Security numbers identify individuals or estates of descendants. Social Security numbers consist of nine digits. A Social Security number is hyphenated after the third and fifth digits: XXX-XX-XXXX.
Social Security numbers can also be identified by the state from which it was issued. The first three numbers are a key to where the applicant was living or when they applied for a Social Security number. However, since many people do not live in the same place as where they originally applied, be careful in assuming that there could be something "fishy" going on when the Social Security number does not match the State.
The Underwriter should ask for a letter of explanation and/or a letter from the Social Security Department to validate a Social Security number for the following circumstances:
1. More than one Social Security number appears anywhere in the file for the same person.
2. The Social Security number given produces a "Hawk Alert" warning or a "victim" or "fraud" statement.
3. The Social Security number cannot be legitimized through the use of the lists provided on the Underwriting Admin web site (http://www.ssa.gov/foia/stateweb.html).
If ever in doubt, a call to the Social Security Administration can be beneficial (800) 772-1213.
VERIFICATION OF EMPLOYMENT (VOE)
* Income is reported in round dollar amounts.
* Employed by family member.
* Addressed to a particular person's attention (except when it's the Personnel Manager).
* Employer's address is a mail drop or Post Office box.
* Document is not creased (possibly never folded and mailed).
* Evidence of whiteout or strikeovers.
* Incorrect spellings.
* Excessive praise in remarks section.
* Date of hire was on weekend or holiday (Use Perpetual Calendar to verify).
* Overlaps in current and prior employment dates.
* Drastic change from previous position or profession to current employment status.
* Numbers appear to be "squeezed-in."
* Employer's signature dated less than one day after originator's signature (never mailed).
* Illegible signatures with no further identification.
* Unrealistic income for age and/or occupation.
* Borrower's name or initials in company name (may be self-employed or a relative may have completed the verification form).
* Income is primarily commissions or consulting fees (self-employed).
* Inappropriate verification source (secretary, relative, any party to the transaction, etc.).
* No prior years earnings indicated.
* Seller has same address as employer.
* Prior employer "out of business."
If the business that is completing the VOE is a large, established, well-known company, the VOE is usually credible. However, when it is a small operation, more documentation may be required to validate the data.
Many times a phone call or W-2 with a current pay stub may validate the information. However, when making telephone verification, make sure to be alert to any inconsistencies or peculiarities in the manner to which the phone is answered. Red flags could be:
* Answers "hello" versus naming the business (could indicate a residence).
* Does not have a Personnel Department.
* Does not recognize the employee's name or the person who signed the VOE.
* Telephone number is unlisted or disconnected.
W-2 FORM
* Large employer has handwritten or typed W-2.
* Print on W-2 matches the print of the federal tax return (Form 1040).
* Invalid Employer Identification Number (Refer to IRS Federal Employer Chart).
* Copy submitted is not "Employee's Copy" (Copy C).
* FICA, Medicare, and/or SDI taxes withheld exceed ceilings (Refer to Taxable Wage Chart).
On the standard W-2, the income is broken down to reflect the FICA (Social Security tax), Medicare, federal and state income tax, state disability tax (SDI-CA only), as well as the wages, tips, and other compensation. Some companies add the Social Security and Medicare together, while others break it out into two separate categories. These are calculated at different rates and have different maximum limits. The amounts have changed over the years; therefore, you need to make sure you are using the correct year.
PAYSTUBS
* Large employer having handwritten or typed check stub.
* Company name not imprinted.
* FICA deductions exceed ceilings.
* Unusually high or low income tax deductions.
* Deductions not clarified.
* Name of borrower and/or Social Security number does not match information on loan application, tax returns, and/or credit report.
* Check stub numbers for each pay period are in sequence.
* Income figures appear in bolder type than pre-printed information (may indicate pre-printed form photocopied before income numbers typed in).
TAX RETURNS
* Address and/or profession does not agree with other information submitted on the loan application.
* No FICA (self-employment) paid by self-employed borrower.
* Income or deductions shown in even dollar amounts.
* High income taxpayer with few or no deductions.
* High income taxpayer does not use a professional tax preparer.
* Paid tax preparer hand writes tax return.
* Self-employment income shown as wages and salaries (okay if incorporated).
* Unemployment income shown.
* Evidence of whiteout or alterations (printed lines appear to be "broken").
* Different handwriting, type style, or computer software packages used within one return.
* No estimated tax payments made by self-employed borrower.
* Type style and alignment of type is the same for all tax years submitted.
* Tax preparer is a relative.
* Tax return is incomplete.
* Information of W-2 does not match that on the tax return.
SCHEDULE A (Itemized Deductions)
* Real estate taxes paid but no property owned (or vice versa).
* No mortgage interest expense paid when borrower shows ownership of property (or vice versa).
SCHEDULE B (Interest and Dividend Income)
* Amount or source of income does not agree with information submitted on application.
* No dividends earned on stocks owned (may be closely held).
* Borrower with substantial cash in bank shows little or no interest income.
SCHEDULE C (Profit/Loss from Business Owned)
* Gross income does not agree with total income from Form 1099's.
* No IRA or KEOGH deductions.
* No "cost of goods sold" for retail or similar operations.
* No Schedule SE filed (computation of self-employment tax).
SCHEDULE E (Rents, Royalties, Partnerships, and Trusts)
* Additional rental properties listed but not shown on loan application
* Net income from rents plus depreciation does not equal cash flow as submitted by borrower.
* Subject property appears as a rental when borrower is applying for an owner-occupied loan.
* Borrower shows partnership income (may be liable as a general partner).
There are other sources within each Region to check on the legitimacy of information received. There are numbers to call to get information on tax returns and whether they have been filed in the current year. Refer to State Investigative Resources for a list of state specific phone numbers which can be used to verify licensing and business registration as well as several other areas of possible concern.
VERIFICATION OF DEPOSIT (VOD)
* Cash in bank not sufficient to complete transaction.
* New or recently opened bank account.
* Unrealistically high balances for age and/or occupation.
* Round dollar amounts (especially on interest bearing accounts).
* Significant change in balance over prior two (2) months.
* Original VOD not creased (possibly never folded and mailed).
* Evidence of whiteout of strikeovers.
* Numbers appear "squeezed-in."
* There is no date stamp or "date received" stamp on the document by the depository (VOD may have been completed by the borrower).
* Bank account not in borrower's name.
* Excessive balance in checking account vs. savings account.
* Account was opened on a Sunday or holiday (Use Perpetual Calendar to verify).
* Illegible bank employee's signature with no further identification.
* Depository's signature dated less than one day after originator's signature (never mailed).
* Non-depository "depository" - escrow trust account, Title Company, etc.
* Brokerage statements from "lesser known" brokerage houses.
BANK STATEMENTS
* Regular deposits (payroll) significantly different from income stated on application.
* Earnest money deposit not debited from checking account.
* NSF ("non-sufficient funds") items noted.
* Large withdrawals (may indicate undisclosed financial obligations or investments).
* Statement appears "homemade" or altered (possible "cut and paste").
* "Interest earned" or "dividends paid" on statements different from income stated from those sources on application.
* Address on statements different from address indicated on application.
GIFTS
* Gift from "friend" or "distant relative."
* Signature or handwriting on gift letter and/or check similar to those found on other documents in loan file.
* Occupancy is questionable and borrower using 'gifted' funds.
* Gifted funds seem unrealistic compared to the transaction; non owner or second home.
CREDIT REPORT
* No credit history (possible use of alias).
* Invalid Social Security number or variance from that on other documents.
* Personal data not consistent with handwritten mortgage application - name, addresses, age, "Jr." vs. "Sr.", etc.
* AKA or DBA indicated.
* Employment information is different from mortgage application and VOE.
* Recent mortgage inquiries from other mortgage lenders.
* Numerous inquiries within last 90 days.
* Numerous recently opened credit accounts.