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How to Avoid a Principal Reduction Program Scam

Crooks Prey on Underwater Homeowners

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Cutting debt in half

If the principal reduction program sounds too good to be true, it probably is a scam.

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I am not going to beat around the bush about these principal reduction program scams. There are basically only two places to get a reputable principal reduction of your mortgage. Any other company is most likely a scam. Here are the two places 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 for you. Help is available for underwater homeowners for free through the Obama Making Home Affordable program.

Warning Signs the Principal Reduction Program is a Scam

There is no free lunch, no free bailout money for homeowners, regardless of what a website might promise you. Anybody can put up a website and make empty promises. Don't get sucked in. 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 is not available. There is no "contact us" button apart from a toll-free number.

  • There are no individual names listed as company owners nor board of directors.

  • Some of the web pages are blank or under construction.

  • When you call 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. Nobody can 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.

Check Out 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.

  • Google the company name and read what others have to say the company. You're probably not the first person to get scammed.

  • Call a real estate agent, mortgage broker, attorney or tax accountant whom you trust and respect. Ask that person to check out the 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 department of real estate and your state's Attorney General. Help to shut them down so they can't victimize anybody else.

At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.

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