Mortgage fraud: What you need to know to avoid it

 When buying a house, having your proverbial ducks in a row can both ease any stress you might feel as well as protect you from dangerous financial and legal risks, including mortgage fraud.

While mortgage fraud is a serious legal offense, it’s important not to live in fear during the home purchase process, because you stand to gain so much. Here’s another comfort factor: You can take steps to avoid mortgage fraud.

What is mortgage fraud?

Mortgage fraud refers to the deliberate act of lying or omitting information used by a mortgage underwriter or lender to fund, purchase, or insure a mortgage loan. As you’ll see as you read further, both borrowers and mortgage lenders can commit fraud.

The two primary categories of mortgage fraud include:

• Fraud for profit. Industry insiders such as bank officers, appraisers, mortgage bankers and real estate agents usually commit this fraud type. These insiders use their industry knowledge to facilitate fraud by misusing the mortgage lending process to steal cash and equity from lenders or homeowners.
• Fraud for property. Borrowers typically commit this fraud to gain or maintain ownership of a property. For example, a home buyer may lie about their employment status, income, property value, credit situation, or other aspects of their finances in hopes of obtaining a loan approval or more favorable loan conditions.
  

Why commit mortgage fraud?

A borrower or industry professional may be motivated to commit mortgage fraud for various reasons.

Mortgage Lender Frauds

Mortgage company fraud typically occurs because it maximizes the lender’s profits on the transaction by misrepresenting their clients’ financial information. Any professional can commit fraud for profit in the loan transaction.

Borrower mortgage frauds

When committing fraud for property, borrowers are typically motivated by the desire to retain their current home or obtain a new one. These borrowers believe they’re unlikely to be approved for a loan using honest information, so they instead misrepresent or omit relevant information.

10 common types of mortgage fraud

From fraudulent property flipping to foreclosure scams, there’s no lack of mortgage fraud schemes to be aware of. It may sound daunting, but knowledge is power. The examples highlighted in detail below are based on the FBI’s list of the most common types of mortgage fraud.

Although these are the most notable schemes, keep in mind that this isn’t an exhaustive list, and some types of fraud likely haven’t been invented yet.

1. Property flipping

Buying, renovating, and reselling property isn’t illegal. If it was, property flipping would certainly be more controversial. However, in some situations, flipping houses becomes fraudulent.

This type of mortgage fraud occurs when a property is purchased below market value and immediately sold for profit, typically with the help of a corrupt appraiser who inflates the value.

2. Asset rental

Asset rental fraud occurs when loan applicants borrow or rent the assets of others to make themselves appear more qualified for mortgage financing. After the mortgage closes, the money is typically paid back to whomever it was borrowed from.

3. Equity skimming

With equity skimming, investors may use a straw buyer – someone who purchases property on behalf of another person. Using false income documents and credit reports, the investors obtain a mortgage loan in the straw buyer’s name. After closing, the straw buyer passes the property to the investor in a quitclaim deed, which gives up all rights to the property and gives no guarantee to the title, which represents the legal rights for ownership and residential property use.

Once in their name, the investor doesn’t make any mortgage payments but instead rents the property until the event of a foreclosure – typically, several months later – therefore profiting from the rental income.

4. Foreclosure scams

Homeowners also may fall victim to foreclosure relief scams. In this type of mortgage fraud, homeowners at risk of defaulting on their loan or whose home is in foreclosure are misled to believe they can save their home by putting the property in the name of a third-party investor. The perpetrators make a profit by then selling the property using a fraudulent appraisal, therefore stealing the seller’s proceeds.

In this scheme, homeowners may be led to believe they can rent the property for a minimum of a year and repurchase the home once their credit has improved. However, the scammers don’t make the mortgage payments, and the property usually ends up in foreclosure.

To stay safe from this scam, avoid sharing any money or information with a third party until you’ve contacted your mortgage lender or servicer.

5. False identity usage

Scammers often use a false or stolen identity to commit mortgage fraud. This happens when the scammer obtains financing by using an unknowing victim’s financial information – often in the form of a Social Security number, stolen pay stub, falsified employment verification form, or some combination of these. The scammer then obtains a fraudulent mortgage on a property they don’t own or occupy.

Physical documents, from bills to checks, can put you at higher risk of identity theft because they often contain sensitive information. You can protect yourself by moving to paperless billing and making digital payments.

6. Inflated appraisals

False appraisals are another common method of mortgage fraud. Appraisal fraud may be committed by the appraiser alone or with the help of other professionals, including a builder or a mortgage banker.

In some cases, a corrupt appraiser may undervalue a property to ensure an investor will be able to purchase it. More often, though, appraisers inflate the value of a property to increase the purchase price and, as a result, maximize their commission.

7. Loan modification scams

You’ll also want to watch for loan modification scams, another common type of mortgage scam. Loan modification scams often falsely promise to save you from foreclosure. Here are some red flags that could indicate a loan modification scam. Scammers might ask you to:

• Pay fees upfront to receive services or promise to grant you a loan modification
• Sign over your property’s title or ask you to sign papers you don’t understand
• Encourage you to make payments other than to your servicer or lender
• Tell you to quit making your mortgage payments

In other words, if something seems “off,” it likely is.

8. Short sale fraud

Short sales occur when you acquire a property below market value, or when the sales price is less than the seller’s existing mortgage loan balance. Short sales help both the lender and the homeowner because they help the seller get out of the house and help the lender avoid foreclosure.

Short sale fraud often occurs when scammers approach distressed homeowners with a bogus purchase contract that they will present and negotiate with the mortgage lender for the homeowner. The scammer will obtain the property to do alterations, secure a new loan on the property, and rent the home to an independent third party.

Another short-sale fraud involves fraudsters working with real estate agents, appraisers, or others to offer faulty appraisals to potential sellers or banks. The scammer may resell or finance the home at real market value.

9. Reverse mortgage fraud 

Reverse mortgage fraud primarily affects the elderly, because they are available to those age 62 and older. Reverse mortgage loans allow homeowners to borrow money using their property as security for the loan. Borrowers don’t make monthly mortgage payments, but the loan gets repaid when the borrower no longer lives in the home. Interest and fees get added to the loan balance each month, and they must pay property taxes and homeowners insurance.

Reverse mortgage scams might include:

• Foreclosure scams, where scammers offer foreclosure relief using a reverse mortgage
• Equity theft scams, involving dishonest appraisers, attorneys, and loan officers who inflate an appraisal on a home
• House flipping scams, where fraudsters use reverse mortgage proceeds to buy another property 

Unethical financial planners or untrustworthy relatives may also talking you into an unnecessary reverse mortgage, or veteran reverse mortgage scams, even though the Department of Veterans Affairs doesn’t offer reverse mortgages.

If you have elderly parents or grandparents, consider talking to them about reverse mortgage fraud so they don’t find themselves in this situation.

10. Loan origination fraud

Mortgage lender fraud includes loan origination fraud, when borrowers, brokers, or lenders obtain mortgage approval under false pretenses. For example, a loan officer at a bank may alter or falsify account statements, purchase and sale agreements, income figures, credit reports, and deposit forms verification to benefit the loan officer and possibly a colluding mortgage broker.

As you can see, mortgage lender fraud might even occur within your lender’s office.

How to avoid mortgage loan fraud

You can avoid mortgage fraud by following these best practices:

• Use an attorney to review all legal paperwork. This can ensure you understand everything you’re signing. Real estate attorneys are also well-versed in these transactions and can recognize potential red flags.
• Check the references and referrals of all participating parties. These individuals include real estate brokers and loan officers. You can look online to find reviews and references for your mortgage professionals. When in doubt, get referrals from trusted friends or family members.
• Research and verify the property’s title history. A title search will confirm who owns the property you want to buy and any property debts you need to know about, such as unpaid property taxes, homeowners association fees, and bills for home improvements.
• Review final loan documents to ensure all information is accurate. Many steps and documents are involved in the mortgage process, and it can be hard to track them all. Make sure you review all final loan documents to ensure the information is correct.
• Review the property’s tax assessments to verify the assessed value. The assessed value is the property’s determined value, based on sales of similar homes and home inspection The assessed value is also used to calculate tax rates. Doing your own research on the property can help ensure you have accurate insight into the home’s value so you won’t pay more than the home is worth.

What should I do if I’ve been scammed?

If you think you’re a victim of a mortgage fraud scam, you can report it to relevant federal agencies, including your state and local consumer protection agencies and your mortgage lender. They will know how to help you take the next steps.

You can also report your experience to the Internet Crime Complaint Center, a division of the FBI, the Federal Trade Commission, and report a company to the Consumer Federal Protection Bureau.

What is the penalty for mortgage fraud?

Because mortgage fraud is a serious offense, it can have serious legal consequences. Local, state and federal laws hold borrowers and mortgage professionals accountable.

Although the specific consequences of mortgage fraud vary with the nature of the fraudulent activity, it’s possible under federal and state laws for a mortgage fraud conviction to result in up to 30 years in federal prison and up to $1 million in fines.

Current home loan fraud methods

Do you live in a state with a high instance of mortgage fraud? New York, Florida, California, Connecticut, and New Jersey report the most fraud. In a macro view, mortgage application fraud risk increased 8.3% nationally year-over-year and increased 1.1% since last quarter. In addition, one in 123 applications were estimated to have fraud indications in the second quarter of 2024.

However, that doesn’t mean you need to live in fear or as if danger is lurking around the corner. You can get the right people on your side to avoid fraud.

The bottom line: Stay informed to avoid mortgage fraud

Now that you have the tools to recognize mortgage fraud, you have the power to recognize when a scam might occur. It can give you immense peace of mind to understand why people and entities may be motivated to commit mortgage fraud. To      ensure your own safety and success, you can hire a real estate attorney to review all legal paperwork prior to closing on a property, check references and referrals, research title history, review final loan documents, and review tax assessments. Don’t feel as if you need to go it alone – there are experts available to help you.

Interested in learning about other actions you can take when buying a home? Learn more about common mortgage scams to avoid so you’re fully prepared when navigating the home buying process.