Mortgage fraud, also called home loan fraud, occurs when a buyer, seller, or lender omits or misrepresents information in order to get a favorable financial situation in a home purchasing transaction. Mortgage fraud can be committed on an individual level or by organizations that intend to defraud homeowners for profit.
Informed home sellers and buyers can learn to identify mortgage fraud schemes and take steps to avoid it throughout the home sale process.
Mortgage Fraud Explained
Mortgage fraud is defined by the FBI as “misstatement, misrepresentation, or omission in relation to a mortgage loan which is then relied upon by a lender.” For example, a potential buyer could lie about their income to get a better interest rate, or an inspector could lie about the state of the house to increase its value.
A misstatement or misrepresentation is a flat-out lie, like sharing false employment records to seem like you make more than you do, while an omission intentionally hides information that would be valuable to the buying and selling parties when setting the loan or terms of sale. However, this is an umbrella term to describe several scams and strategies for committing fraud.
There are two main types of mortgage fraud: housing and profit:
- Fraud for housing occurs when a potential buyer deliberately misrepresents themselves in order to get a favorable mortgage or housing situation.
- Fraud for profit occurs when buyers or development companies manipulate their financial situation to profit off of hyper-inflated mortgages or unfair loans. Mortgage fraud for profit can be committed by anyone in the real estate process, including the loan officer, home appraiser, and insurance agent.
The federal government levies significant jail time and fines for people who try to commit mortgage fraud. Mortgage fraud penalties can result in up to 30 years in prison and up to $1 million in fines for convicted offenders.
What Drives Mortgage Fraud?
The total number of mortgage fraud cases fluctuates each year because fraud is driven by the housing market and the American economy. For example, when more people try to buy homes, the total number of available homes in that area decreases, while other homes become too expensive for the average buyer. Some buyers will try to commit mortgage fraud to get a home at an affordable rate or to get sellers to accept their bids.
Additionally, the Federal Reserve sets interest rates at higher and lower levels depending on the American economy’s health. If it looks like the Fed is going to raise interest rates, then more buyers may try to commit fraud in order to get a home sooner and at a better interest rate.
10 Types of Mortgage Fraud
As you start to dig into the different types of home loan fraud, you can see how different players in the home sale process can omit or misrepresent information. Below are 10 common scams that fall under the mortgage fraud umbrella for you to look out for.
With occupancy fraud, the home buyer deliberately misleads the seller and mortgage lender as to what the home will be used for. They may say that it is a home to live in when they plan to rent it out as an investment property. This is because home buyers may get better interest rates than investors.
“Fake Buyer” Fraud
“Fake buyer” fraud is a scam where the actual buyer takes on the identity of someone else in order to buy a home. The “fake buyer” typically has a better credit score and debt-to-income ratio and therefore gets a better loan rate than the actual buyer. This “fake buyer” can also be referred to as a “straw buyer.”
Once the buying process is complete, the deed will then get transferred to the actual buyer. Oftentimes, this process is committed through identify theft, where the “straw buyer” has no idea that their information is being used to buy a property. However, it can also happen through two active participants, where one person knows their identity is being used by another person to buy a home.
Financial Income Fraud
The form of fraud occurs when a buyer lies about their income levels in order to qualify for a home loan or a better interest rate. In this case, a buyer wouldn’t be able to buy a house or would have to pay additional interest and fees to get approved.
There are some common warning signs of financial income fraud. These include generic job titles and an inability to verify employment information and income. Another red flag is when the stated income doesn’t match the applicant’s bank statements or assets.
Home Appraisal Fraud
Home appraisal fraud is often committed by the home seller or various parties involved in the selling process. It occurs when the value of the home is appraised for more than it is worth. When this happens, the selling parties make more on the sale of the property.
Potential buyers can spot appraisal fraud by checking homes of similar value in their area. They can also look for renovations that were never made and missing data in the appraisal.
Undisclosed kickbacks occur when money that the lender is not aware of exchanges hands. For example, a buyer and seller may exchange money so that there is a lower overall home sale price. The lender is not aware of this kickback and may set a lower loan price (including interest rates and APR) for the buyer.
A “Silent” Second Mortgage
A “silent” second mortgage is another way for a buyer and seller to work together to defraud a lender. This occurs when a buyer can’t afford a down payment on the house. Instead, they take out a loan to cover the down payment, making it seem like they have more income than they do.
The “silent” second mortgage comes in when the buyer borrows the money for the down payment from the home seller. In this way, the buyer ends up paying two “mortgages” for the house.
Down Payment “Gifts”
A third way that buyers and sellers can work to defraud lenders is with down payment “gifts” to one party. These gifts are actually loans that are meant to be repaid; however, the seller will present the gift to the buyer in order to lower the sale price of the house. The lender doesn’t realize that the gift is a loan and sets lower interest rates for the home.
This occurs when the buyer claims that there has been a deposit on the house when there actually hasn’t. This places the buyer in a better financial light and gives them more favorable lending terms.
Predatory loans are often presented to the buyer as a good deal by the lender. These loans might be more than the buyer can afford or have higher interest rates. Buyers that look at multiple loan options can better determine which loans are in their best interest to take.
Foreclosure Relief and Debt Management
Mortgage fraud can happen even if you’re not looking to buy or sell your home. Scammers contact homeowners with offers to reduce debt or improve mortgage rates. The primary targets of these calls are homeowners who are already facing foreclosure or can’t make their payments.
These calls are meant to prey upon homeowners who are already in vulnerable situations. They claim that they will make the full payments on behalf of the mortgage owner for a fee, but never actually make the payments. The result is that the homeowner defaults on their mortgage and falls further into debt.
How to Avoid Mortgage Fraud
Both homebuyers and sellers need to be aware of mortgage fraud. Even if you are trying to buy a home honestly, any representative within the buying process could conspire to commit fraud against the home buyer or seller. Below are a few steps provided by the FBI that you can follow to avoid falling victim to mortgage fraud.
- Seek out referrals within the real estate process to work with people who can be trusted.
- Do your research on the people you work with. You can check their professional licenses against state records to see if they have any negative marks against them.
- Know the housing market in your area. If you can get an idea for what similar homes sell, then you can know what kind of offers to expect.
- Avoid making false statements or being persuaded to do so.
- Do not sign blank documents or documents with empty fields. The risk is that these fields could be filled in later without your knowledge or approval.
You can also increase your chances of avoiding loan fraud by challenging offers that seem too good to be true. These include “no money down” loans and unsolicited offers to reduce your mortgage. Many of these offers are either illegal or are gimmicks to take advantage of people in vulnerable financial situations.
Stay Informed to Prevent Mortgage Fraud
The FBI continues to investigate mortgage fraud and tries to inform the public on how to avoid it. They advise that while you may need to take extra steps in the short run to do your research and vet the people in the buying and selling process, this extra effort is worth it in the long run. This research could save you money and even your house.
Stay alert when buying your selling your house and take steps to be more informed by reading up on mortgages and other parts of the home buying process.