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Mortgage fraud is a deliberate act to deceive a mortgage underwriter, lender or borrower in the process of buying, funding or insuring a mortgage loan. Both borrowers and lenders can commit mortgage fraud, either to gain ownership of a property or to steal from lenders or homeowners.
Mortgage fraud is a serious crime with potentially severe consequences, so it's important to know how it works and what you can do to avoid it.
What Is Mortgage Fraud?
Mortgage fraud involves any kind of deliberate deception—from a borrower, lender or other insider—to fund, purchase or insure a mortgage loan. It includes lying about or omitting material facts that mortgage underwriters and lenders use to make decisions.
Homebuyers may commit mortgage fraud in an attempt to gain ownership of a property, particularly in instances where they may not qualify for favorable loan terms or are at risk of being declined a loan altogether.
On the other hand, dishonest lenders and mortgage professionals, which may include loan officers, brokers, appraisers, real estate agents and more, may misrepresent borrower information to maximize their profits on a home sale or mortgage loan or even steal cash or equity from homeowners.
Types of Mortgage Fraud
There are several ways that mortgage fraud can occur. Here are some of the most common ones to watch out for.
Mortgage lenders typically offer lower interest rates and down payment requirements to borrowers who intend to occupy the home they're buying.
With occupancy fraud, loan applicants deliberately misrepresent their intended use of the property, saying they'll reside in the home when they really plan to rent it out.
Straw Buyer Fraud
This form of mortgage fraud occurs when an individual—real estate professionals call them "straw buyers"—applies for a mortgage to buy a property on behalf of someone else. The straw buyer agrees to occupy the home and make the payments, but it's really the other person who intends to occupy the home and pay the mortgage.
The straw buyer typically has better credit than the real homebuyer, giving them a better chance of getting approved for the loan with favorable terms.
In some cases, the straw buyer may be in on it and earn a commission for their participation. In others, the fake buyer may be an unsuspecting victim who has had their identity stolen and may not know that his or her name, credit, and financial data are being used to perpetuate mortgage fraud.
Home Appraisal Fraud
Home appraisal fraud occurs when a home is fraudulently inflated beyond its actual value. A higher home appraisal usually leads to a higher home price and more cash for the home seller.
Appraisal fraud is particularly common in property flipping, where a home is purchased below the market value and immediately resold at a profit with an inflated appraised value.
As the name suggests, this type of fraud involves a borrower or mortgage professional reporting inaccurate income information to get a better deal or a bigger loan. It can also include falsifying income documents in an attempt to qualify for a mortgage loan the borrower otherwise may not get.
Asset Rental Fraud
With this type of fraud, a borrower may rent or borrow assets from other individuals to make it appear as though they're more qualified for a mortgage loan than they actually are. Once the mortgage closes, they return the assets they rented or borrowed to the original owner.
In this type of mortgage fraud, scammers contact homeowners who may be falling behind on payments and offer help in an attempt to avoid foreclosure.
The scammer may ask the homeowner to put the property in their name and offer to make the payments for a homeowner in exchange for rent payments to their company. However, they don't actually make the mortgage payments, and the home goes into foreclosure anyway.
What Is the Penalty for Committing Mortgage Fraud?
Mortgage fraud is a serious offense and can lead to prosecution and even jail time. Under U.S. federal and state laws, mortgage fraud can result in up to 30 years in federal prison and up to $1 million in fines, with specific consequences depending on the details of the crime.
As a result, it's crucial to take steps to avoid mortgage fraud in all of its forms.
How to Avoid Mortgage Fraud
There are several steps you can take to avoid committing or becoming a victim of mortgage fraud, including:
- Be honest. When it comes to reporting your financial information, including your income and assets, provide only accurate information. While it's perfectly acceptable to borrow money or receive a gift from a friend or family member for a down payment, disclose the details of the loan or gift to your lender for full transparency.
- Work with reputable professionals. If possible, try to get referrals for realtors, brokers and other professionals from people you know and trust. Additionally, take some time to research the professionals you're working with to determine whether you're comfortable working with them.
- Thoroughly review all loan documents. You'll get a lot of disclosures throughout the mortgage process, and while it's tempting to skip the fine print and sign them, take your time to read everything to ensure that all the information is accurate.
- Avoid aggressive mortgage professionals. Try to avoid loan officers, mortgage brokers or real estate agents who push you hard to sign documents or make decisions you're not ready for.
- Consider working with a real estate attorney. Many states require homebuyers to hire a real estate attorney for the closing process. But even in states where it's optional, you may consider hiring one to review all of the paperwork and look out for red flags. They typically charge $150 to $350 per hour.
Get Your Credit Ready for a Mortgage Loan in Advance
Long before you start the mortgage process, it's important to prepare your credit. Start by checking your credit score to evaluate your credit health and reviewing your credit report for potential areas you can improve.
Additionally, focus on paying all of your bills on time and limiting large purchases—particularly on credit cards—and avoid taking out new credit for other purposes. While your credit history is just one piece of the mortgage underwriting puzzle, it can have a significant impact on your ability to get approved and the terms you qualify for.