Mortgage fraud: What it is and what to do about it

Mortgage fraud is a major problem for borrowers nationwide, but with a little know-how and due diligence, you can avoid scams and bad actors trying to swindle you, your mortgage lender, or your title insurance company.

Common mortgage scams include falsifying documents, lying about income on a mortgage application, and faking a past home sale. Here’s what you need to know to avoid being the victim of – or accidentally committing – mortgage fraud.

Key takeaways:

• Any misrepresentation on a mortgage application or during the underwriting process is considered fraudulent activity.
• Mortgage scams can lead to significant penalties or jail time.
• Many victims of these scams are older Americans, people living with disabilities, or first-time home buyers.

What is mortgage fraud?

Mortgage fraud is an all-encompassing term for intentionally deceiving a borrower, seller, lender, or other party to obtain a mortgage loan or buy a home. It includes lying on applications, falsifying records, or presenting unsuspecting consumers with fake or predatory home loan services.

Mortgage fraud primarily comes down to two categories:

• For profit: Many mortgage fraud schemes aim to earn a profit by defrauding consumers, lenders, insurers, landlords, and others involved in a real estate transaction. That could include attempts to steal funds through fraudulent wire transfer instructions or to charge fees for unnecessary or nonexistent services.
• For housing: Some people looking to buy or rent a home may lie or cheat on the application to get approved for a home they don't qualify for. This can lead to quick foreclosures or evictions, among other problems, costing the lender or landlord money, and potentially leading to criminal and civil legal penalties for committing fraud.

Who commits mortgage fraud?

Anyone can commit mortgage fraud. Borrowers, appraisers, brokers, real estate agents, and title company employees may all have incentives to commit fraud, whether it’s to earn fees, secure housing, or steal funds.

Here are some examples of common methods used by fraudulent individuals so you can avoid them:

• Forging key documents to give to underwriters. Fudging a number on your mortgage application may not seem like a big deal, but it’s actually a crime. Providing any falsified documents or information for underwriting is mortgage fraud. Forged signatures also are illegal.
• Colluding to defraud an institution or individual. Working with another person to commit mortgage fraud, including a real estate agent, appraiser, or someone who works at another financial company, is called collusion.
• Participating in a ghost closing. A fake closing could be used to trick online housing websites into showing higher home prices for recent sales, sometimes by posting a fake closing, potentially leading future buyers to overpay for a property.
• Tying the lien on a house to a shell company. Instead of taking out a loan in their own name or that of a legitimate company, fraudsters may establish a fake company or use fake information to obtain a loan with no intention of repaying.
• So-called "phantom buyers" are offering to purchase your home. Real estate agents could make up fake buyers offering to buy a house to drive up the sale price artificially or trick you into paying extra fees.

Fraud could also be committed by someone completely unrelated to the loan. A cybercriminal could send false wire transfer information before the scheduled closing on a house to steal funds from unsuspecting, law-abiding individuals.

Types of mortgage fraud

We’ve looked at the different types of people who may be involved in mortgage fraud, as well as some methods they use in common mortgage scams.

Here’s a look at different types of mortgage fraud commonly employed today:

Reverse mortgage scams

A reverse mortgage allows older homeowners to borrow against their home equity without having to make monthly mortgage payments. Seniors are a consistent target for scammers, as they’re often more susceptible to signing bad deals, including predatory reverse mortgages with excessive fees or interest rates.

If you’re facing high-pressure sales tactics or don’t understand the loan terms, consider talking to a trusted family member, financial advisor, or lawyer before signing any documents.

Appraisal fraud

Appraisal fraud is a scheme in which an inflated appraisal is used to secure a mortgage for more than the property is worth. A real estate agent or home buyer may pressure an appraiser to value the home higher to improve the likelihood that a loan is approved or to borrow more money.

The borrower could wind up with a underwater mortgage, meaning they owe more than their property is worth, among other financial challenges.

Income misrepresentation

If a borrower is worried they don't earn enough to buy a house, they may alter documents to make it appear they earn more than they really do. This is income fraud.

In addition to committing mortgage fraud, the borrower is likely to end up unable to keep up with loan payments. The underwriting process protects both the borrower and the lender from foreclosure, and lying can result in the borrower owning a home they can't really afford.

Bait-and-switch scams

In a bait-and-switch scam, a lender or other professional service provider may begin by offering a deal that seems too good to be true. Once the borrower is committed to the process, they swap out that good deal with one that’s not nearly as favorable. That may be a different type of mortgage, one that doesn’t conform to Fannie Mae and Freddie Mac standards, or one from a shady mortgage lender with questionable practices.

They might do this by using high-pressure tactics to get the documents signed, or by misleading the borrower into signing documents with terms different from those initially presented. In any case, it’s a bad deal for the borrower, and it’s mortgage fraud.

Loan flipping

Homeowners have many good reasons to refinance a mortgage, such as a significant increase in their credit score or home value that could lead to better loan terms. But if a predatory lender or mortgage broker pressures someone to repeatedly refinance, even when it's not in their best interest, it's called loan flipping.

Protect yourself by working only with trustworthy, well-known mortgage lenders like Rocket Mortgage.

Closing fraud

In closing fraud, scammers trick home buyers into wiring their closing funds to a fraudulent account. Rather than going through with the home purchase as intended, the bad guys aim to quickly transfer the funds and make off with a big payday. They may send an email claiming to be your real estate agent or work at the bank, but they’re really a cybercriminal in disguise.

If you ever receive updated wire transfer instructions or are unsure of the ones you have for any reason, it’s best to call your title company or closing agent directly at a publicly listed number, such as one on their website, and confirm verbally that the wire instructions are correct. Don’t trust an email or a phone call from someone you don’t know when sending funds for real estate closings.

Consequences of mortgage fraud

The consequences of mortgage fraud can be far-reaching, including wrecking one's credit score, losing one's money, or winding up in prison. The legal, financial, and personal stakes of mortgage fraud include, but are not limited to:

• Civil and criminal penalties. Civil penalties are financial consequences for actions, including the payment of costs, the reimbursement of the other party's legal fees, and punitive damages. Criminal charges and penalties vary by crime and jurisdiction. The long-term financial costs can drain your home equity and bank account.
• Loss of property or foreclosure. If you buy a home fraudulently, you should expect to lose the house. That could be because you ultimately can't pay the mortgage and end up in foreclosure, or the fraud is discovered.
• Impact on the broader housing market. When lenders, insurers, and other real estate businesses lose money to fraud, they have to make up the losses by passing higher costs on to honest, law-abiding customers. The entire housing market is affected. Home prices can be swayed, costing some buyers or sellers, and almost everyone buying or selling a home ends up paying more.

How to protect yourself against mortgage fraud

Whenever you’re working with large sums of money, including a mortgage, keep your guard up and follow these tips to protect yourself:

• Work only with licensed, reputable lenders. When buying or refinancing a home, choose a mortgage lender that has a good reputation. You can check customer review sites for a quick indication of what to expect. Reputable lenders closely adhere to RESPA, a law governing real estate transactions.
• Verify credentials independently. Just because a lender says it’s licensed doesn’t mean it is. The same goes for real estate agents, real estate brokers, and other professionals you work with throughout your application and closing.
• Get everything in writing. Someone’s word may sound good, but unless it’s in writing, it may not hold up in court if there’s a dispute. Look for a Loan Estimate to break down expected loan costs.
• Never pay up front for loan modification services. Loan costs should be paid at closing, so up-front fees are a red flag. Mortgage brokers and lenders operating above board don’t pressure anyone to pay sooner for loan modification services.
• Use an escrow account. An escrow account protects the buyer and seller by keeping funds in a segregated account until a successful closing.
• Use HUD-approved housing counselors. If you’re struggling with affording a home, improving your credit, or understanding anything about home buying or refinancing, only work with qualified housing counselors who are approved by HUD and put your best interests first.
• Monitor your credit reports. Your credit report and credit score play a critical role in mortgage approval. Make sure your credit report is error-free and work to improve your credit score over time. Set up credit alerts, monitor your credit for anything you don’t recognize, and quickly respond to suspicious activity.

How to report mortgage fraud

If you’re a mortgage fraud victim, there’s no reason to be ashamed. It happens to people every day. As soon as you discover fraud, you’ll want to follow these steps.

1. Gather all your documentation

Start by pulling together documents and contact information to establish what happened and who committed the fraud. Before contacting your lender and the authorities, be prepared to offer:

• Emails
• Contracts
• Communication logs
• Bank statements
• Web pages
• Advertisements

Printouts, PDFs, links to websites, and any other notes may help recover funds, prosecute offenders, and protect others in the future.

2. Contact your loan servicer

Contact your mortgage servicing company, the place you send your mortgage payments to every month, and tell them precisely what happened. They'll either help you or point you in the right direction.

Ensure you’re working with the right people or department to rectify the situation expediently.

3. File complaints with government agencies

Next, it’s time to report the fraud to law enforcement and government agencies. You may want to report the crime to your local police department, which may have resources to help. You may also want to report to state regulators, such as a real estate department, a mortgage or banking agency, or the Secretary of State.

For federal reporting, contact the Federal Trade Commission. You can file an online fraud report or call 1-877-FTC-HELP (1-877-382-4357).

You can get more information from the Office of the Comptroller of the Currency as well.

4. Consider hiring an attorney

If you’ve lost money, hiring a real estate attorney could be a good idea. A lawyer can help you work to recover funds and hold the perpetrators accountable.

Legal processes can be stressful, time-consuming, and lengthy. Stay vigilant and calm if litigation is needed. Consider interviewing several prospective law firms to find one with experience in this type of situation, and you believe will do the best job representing your case.

The bottom line: Reporting mortgage fraud is critical

Even if your case seems small in the scheme of things, reporting fraud is essential to protect yourself and others. Every report helps law enforcement get a step closer to shutting down large-scale operators and cutting off repeat scams.

If you’re a Rocket Mortgage customer and believe you’ve been targeted or have experienced fraud or scams, please get in touch with us right away so we can understand what happened and offer any available assistance.