Avoiding Mortgage Principal Reduction Scams

Couple talking to loan officer
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There are basically only two places to get a reputable principal reduction of your mortgage. Any other unrecognized company outside of these two places could be a scam. Plenty of scam artists are at work in this industry whose main goal is to take money out of your pocket and put it into theirs.

Where to Get a Principal Reduction

  • A government-approved principal reduction program
  • A principal reduction program offered by your existing lender

Moreover, you do not need to pay a loan modification company to obtain a principal reduction of your mortgage for you. Help is available for underwater homeowners for free through the Obama Making Home Affordable program.

Bear in mind that mortgage companies generally will not reduce the principal amount of your mortgage unless your home is worth less than your existing mortgage or other extenuating circumstances apply.

Warning Signs

There is no free lunch, no free bailout money for homeowners, regardless of what a fancy website might promise you. Anybody can put up a website and make empty promises. Don't get suckered by such misleading tactics. Just because you find it online doesn't mean it is real. Here are a few warning signs the principal reduction program might be a scam:

  • The company is not affiliated with your existing bank nor the government.
  • You do not recognize the company name.
  • The company address and contact information are not available. There is no "contact us" button apart from a toll-free number.
  • There are no individual names listed as company owners nor the board of directors.
  • Some of the web pages are blank or under construction.
  • When you reach someone at the toll-free number, you feel pressured and confused afterward.
  • You do not fully understand how the program works. Principal reduction programs are fairly easy-to-understand.
  • You are guaranteed that your existing loan will be paid in full. No company can guarantee your existing lender will participate in a principal reduction program. Be wary of guarantees.
  • You are promised that any type of loan and any amount of loan balance will qualify for the program. Outsiders cannot make this promise without more information from you.
  • The principal reduction company asks for an advance deposit or payment in exchange for negotiating or funding a new loan. Advance fee = big red flag! The only check you should write would be for an appraisal.

A Principal Reduction Program

If you have doubts that a principal reduction program is legitimate, listen to your instincts. Your instincts will rarely steer you in the wrong direction. Here are some tips to help you figure out if the company is legit:

  • Contact a HUD-Approved Home Loan Counselor. Click on your state, enter your city and call a free nonprofit agency for advice.
  • Research the company name and read what others have to say the company. You're probably not the first person to get scammed. People flock to the internet to report crooked behavior all the time.
  • Call a real estate agent, mortgage broker, attorney or tax accountant whom you trust and respect. Ask that person to check out the principal reduction company for you.

If you receive confirmation that your instincts are correct, report the principal reduction company to the Federal Citizen Information Center. You might also report the company to your state's governing body of real estate and your state Attorney General. Please don't feel that taking extra steps to report these companies is a wasted effort because your help to shut them down will help to prevent them from victimizing other unsuspecting individuals.