Avoiding Financial Traps 

Recognizing and Steering Clear of Tricks, 

Scams, Fraud, and Other Traps 

Brought to you by 
Avoiding Financial Traps

Because lending transactions often seem complicated, it’s not unusual for 

borrowers to rely on the expertise of professionals for guidance through 

the process. But what if the “professional” you choose is actually a scam 

artist or predator looking to push you into a costly or risky situation? If you 

don’t know the signs of a potential scam, you could become a victim. It’s 

very important, especially in these tough economic times, to recognize and avoid pitfalls 

and traps that can damage your credit, cause financial hardship, and in some cases, even 

cost you your home. 

Recognize the Signs of 

Predatory or Abusive Lending 

Marketers send offers every day — offers of credit, 

home equity loans, mortgage life insurance, refinances, 

and more. It’s important to understand the difference between legitimate opportunity and predatory or 

abusive lending. Here are some signs that should raise 

suspicions: 

 Repeatedly encouraging you to refinance your loan 

within a short period of time (known as “mortgage 

flipping”) and charging high points and fees with 

each refinance. The company may claim that you’re 

getting better rates each time, but be sure to consider how much you’re paying in additional fees and 

interest with each new loan transaction. 

 “Packing” a loan with single premium credit insur

ance products, such as credit life insurance, and not 

adequately disclosing its inclusion, cost, or additional 

fees associated with the insurance. 

 Charging excessive rates and fees to borrowers who 

actually qualify for lower rates and fees. 

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 Including “balloon payments”— a large one-time 

payment — at the end of a payment schedule that disguises the true, higher-than-expected, cost of the loan. 

Scams To Avoid 

Some common scams or fraud to avoid include the 

following: 

 MHA Opportunists: Someone asks you to pay a 

fee in exchange for a counseling service or modification of a delinquent loan. If you’re having trouble 

paying your mortgage, the federal Making Home 

Affordable Program (MHA) offers help through refinancing and loan modifications at no cost to you. 

 Home Title Scam: Someone offers a loan or fast 

cash in exchange for the title to your home. You 

continue to pay the mortgage, but you are no longer 

the owner of the property. 

 Equity-Skimming Foreclosure “Rescue” Scam: 

Someone offers to pay your delinquent mortgage by 

purchasing your home. In turn, you can stay in the 

home as a renter with the option to buy back the 

house when your financial situation improves. Then 

the “buyer” cashes out your hard-earned equity and 

disappears. 

 Foreclosure Rescuers: They pose as professionals and promise to stop foreclosure, often at a high 

price. When they don’t deliver, you are left short on 

cash and out of the home. 

 Home Improvement Loan Scam: A contractor 

requires money up front, but doesn’t complete the 

work. In other cases, the contractor completes the 

work, but for well above the original estimate. 

 Post-Disaster Insurance Scam: In the wake of 

a disaster, someone offers you money in exchange 

for money you will get later from the insurance 

company. You end up getting much less from the 

individual than the insurance company actually 

would have paid you directly. 

 Short Sale Fraud: An unscrupulous real estate 

agent, mortgage broker or other industry professional may attempt to facilitate the sale of your home 

to an affiliated party at below market value, with 

plans to resell it immediately to a third party for an 

immediate profit. Although this may achieve your 
goal of avoiding foreclosure, it may be considered 

fraud if your lender was misled regarding the value of 

your property. 

Avoid Borrowing Pitfalls 

When applying for a loan, follow these tips: 

 Say NO to “easy money.” Beware if someone 

claims that your “credit problems won’t affect the 

interest rate.” If a solicitation is really appealing, get it 

in writing, and then seek a second opinion. 

 Shop around. Always talk to several lenders to find 

the best loan. A loan product or lending practice 

may seem reasonable until compared with similar 

loan products offered by other lenders. 

 Find out about prepayment penalties. Know if 

the loan offered to you charges a fee if you pay off 

your loan early. If it is a requirement of the loan, ask 

about other products that do not contain this type 

of penalty. 

 Make sure documents are correct. Beware of 

anyone offering to falsify your income information to 

qualify you for a loan. Never falsify any information or 

sign documents that you know to be false. 

 Make sure documents are complete. Do not sign 

documents that have incorrect dates or blank fields. 

Be wary of promises that a lender will “fix it later” or 

“fill it in later.” 

 Ask about additional fees. Question any items you 

didn’t request or know about prior to the time you 

are asked to sign the loan documents. When you get 

to the closing table, if any fees or charges differ from 

what was previously disclosed, delay the closing 

until all terms are understood. 

 Understand the total package. Ask for written 

estimates that include all points and fees. Compare 

the annual percentage rate (APR), which takes into 

account both the interest rate and the points and 

fees of the loan. 

 Work with legitimate credit counselors. Beware 

of scam credit counseling and credit consolidation 

agencies. Get all the facts before deciding to combine credit card or other debts into a home loan. 

 Protect home equity. If you are taking equity out of 

your property, only take the minimum. The equity in 

your home typically builds up slowly over time, so it’s 

important to try to preserve it. 

 If you’re not sure, don’t sign! Get advice first from 

a reputable consumer credit counseling agency or 

housing counselor. 

For More Information 

 Avoid scam artists! Learn about common scams in 

your area, and get advice before you enter into your 

next loan agreement. Read more about common 

fraud schemes at FreddieMac.com/avoidfraud. 

 The Freddie Mac CreditSmart® curriculum is a 

consumer guide to better credit, money management, and responsible homeownership. Visit 

FreddieMac.com/creditsmart to download 

consumer resources, available in five languages. 

 “About Homeownership” is the Freddie Mac 

online guide to the homebuying process and 

successful homeownership. Visit FreddieMac.com/ 

homeownership. 

 Visit the Avoiding Mortgage Fraud section of Buying 

and Owning a Home, Freddie Mac’s online guide to 

the homebuying process and successful homeownership: FreddieMac.com/avoidfraud. 

 To find a HUD-approved housing counseling agency 

near you, visit http://portal.hud.gov/hudportal/ 

HUD?src=/i_want_to/talk_to_a_housing_ 

counselor or call 800-569-4287. 

 To learn more about the federal Making Home 

Affordable Program, visit www.MakingHome 

Affordable.gov. 

Source 

Content adapted from the following: 

 Freddie Mac’s award-winning CreditSmart, a multilingual financial education curriculum designed to help consumers build and maintain 

better credit, make sound financial decisions, and understand the steps to sustainable homeownership. 
Brought to you by 

Publication Number 827 n © Freddie Mac, December 2016