7 Steps to Avoid Non-Bank Mortgage Scams

NEW YORK (Credit.com) -- During the height of the mortgage boom, it seemed all you needed to get a mortgage was a pulse. Now that banks have tightened their lending rules considerably, many people find it impossible to get a traditional mortgage.

One of those people is Amber, a Credit.com reader who wrote us recently. Her “credit score is not good enough to go through a bank or small lender,” Amber wrote in a recent comment to our blog.

Through a chain of personal connections, however, Amber’s husband met a man who says he can help.

“This guy says he works with investors and can find a home,” Amber writes. “The investor will finance it and will have the home in my name.”

But before she gives her downpayment, Amber has a few questions. “Is this possible,” she asks. “What are the pros and cons?”

Yes, it is possible, answers Curtis Novy, a mortgage and real estate analyst with Corporate Mortgage Advisors. Seeing an opportunity to make money, many private investors are getting into the mortgage business, he says.

“We are seeing more private lenders who are filling the gap, taking the place of conventional lenders and banks who are just too timid to lend money,” says Novy, who is among those organizing private investors to fund commercial property loans.

But Amber is right to be nervous. “It could be a scam,” Novy says.

How can Amber tell if these private “investors” are legit? How can she avoid getting conned? Novy has a few tips:

1. Never, ever, pay money upfront.

Many scammers say they need “good-faith” payment first, and then they’ll do an underwriting test to see whether the family qualifies for a loan.

This is a trick. Don’t fall for it. Never give anybody any money until you get — and read! — the actual loan document.

“Upfront payment is just asking for trouble,” says Novy.

2. Apply for a bank loan anyway.

Are you sure you can’t qualify? Even if you’re worried about your low credit score, it doesn’t hurt to apply for a loan from an actual bank, or maybe even two or three. They may offer you a loan with a higher interest rate than what they give people with sterling credit scores. But the costs may be roughly equal to those associated with a private loan, since private lenders will surely do the same.

“I would get a second opinion,” Novy says.