Mortgage Fraud: What You Need To Know

When buying a house, you’ll need to consider an array of factors. But having your proverbial ducks in a row can both ease any stress you might be feeling as well as protect you from dangerous financial and legal risks, including mortgage fraud – which we’ll discuss in-depth momentarily.

For right now, just know that mortgage fraud is a serious legal offense, but it’s one that can be avoided. Let’s take a look at how mortgage fraud works, different types of home loan fraud and how to recognize a fraudulent situation involving a mortgage.

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. It can be committed by both borrowers and mortgage lenders.

The two primary categories of mortgage fraud are:

• Fraud for profit: This type of fraud is typically committed by industry insiders such as bank officers, appraisers, mortgage bankers and real estate agents. 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: This type of fraud is typically committed by borrowers in an effort 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.

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

Some industry professionals commit fraud for profit by misrepresenting their clients’ financial information, therefore maximizing their profits on the transaction. Fraud for profit can be committed by any professional involved in the loan transaction.

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.

From fraudulent property flipping to foreclosure scams, there’s no lack of mortgage fraud schemes to be aware of. 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.

Property Flipping

Purchasing, 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 the market price and immediately sold for profit – typically with the help of a corrupt appraiser who inflates the value of the property.

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.

Equity Skimming

With equity skimming, investors may use a straw buyer – or 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 title.

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. 

Foreclosure Scams

Homeowners may also fall victim to foreclosure relief scams. In this type of mortgage fraud, homeowners who are 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 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.

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.

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.

Responsible home buying is the most effective way to avoid mortgage fraud. Follow these best practices to recognize the warning signs and protect yourself from falling prey to mortgage scams:

• 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 types of transactions and can recognize any potential red flags you need to know about.

• 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.

Mortgage fraud is dangerous and illegal, and it can be scary if you don’t know how to avoid it. If you’re a home buyer, you may be a potential target for scammers or at risk of committing fraud yourself. Keep in mind that, in order to ensure your own safety and success, you can consult a real estate attorney to review all legal paperwork prior to closing on a property.

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