Bait and Switch Loans
The homeowner is led to believe that she will receive certain favorable mortgage loan terms. After she has put time and energy into the loan process, she is offered a completely different loan days before settlement or at the settlement table. The trick is that unscrupulous lenders, mortgage brokers, or loan officers are hoping that the homeowner will accept the new loan terms. The new loan terms (swtich) will be to a different loan that has a higher interest rate, a different type of loan such as an Adjustable Rate Mortgage (ARM), Interest Only, Option Interest ARM, Balloon, Second Trust, etc., and have prepayment penalties, less cash to the borrower, more junk fees, promise that the homeowner can refinance in a few months to a better loan product, or have higher lender or broker fees. They bank on the homeowner closing because the homeowner may:
- Be desperate to close on her dream home;
- Feel she has "come too far to lose the home" due to a "change" in the mortgage product;
- Be too afraid to walk away from the deal for fear of losing her deposit.
This scam is usually seen within the context of new construction or custom homes.
The builder and/or his agents will lure a potential buyer into believing that the house that they are touring is the exact same model that they will purchase. The builder will then have the homeowner, on the spot, enter into a purchase contract and entice the homeowner into using their lenders and title company. The scheme is further perpetrated by the builder failing to disclose to the potential buyer that none of the build-outs, countertops, finishes, or fixtures that they were shown are included in the sales price. By the time the potential buyer realizes that the home they are buying is not the home they thought they were buying, they have already given a non-refundable deposit that can be impossible or extremely difficult to get back and the cost to have the exact model will cost tens of thousands of dollars more. This scam is normally perpetrated by the real estate agent and builder who work together to increase sales in a particular development. Normally, when the homeowner asks specific questions of what is and is not included; they are met with general answers like "everything you see is what you get." The goal of the scammers is to secure the deposit money. The deposit serves as money that the potential buyer will have to forfeit in the event that she fails to move forward with the purchase of the home. Deposits can range from 1-3% of the cost of the construction.
Another scam that emerges out of the Bait and Switch is when potential buyers are expecting a certain grade of materials to be used in the construction of their home and the lender uses an undisclosed lower grade of material. The builder's goal in using the lower grade material is to cheapen the cost of building the home so that their profits are maximized. The homeowners are left with a house that will fall apart.
Scams