Mortgage Fraud: What It Is and How To Avoid It

Helpful Tips to Spot Mortgage Fraud and Stay a Step Ahead of Scams

Your homebuying journey will involve many steps, some exciting and some stressful. But even with those more challenging times, you can be prepared by understanding issues like mortgage fraud.

What exactly is mortgage fraud, and—more importantly—how can you avoid it? Let’s dive into understanding what mortgage fraud is and steps you can take to avoid any mortgage fraud scams.

What Is Mortgage Fraud?

Mortgage fraud happens when someone knowingly lies to secure loan terms they couldn’t or wouldn’t otherwise qualify for during a mortgage transaction. For a homebuyer to commit mortgage fraud, it typically involves providing false or incomplete information to a lender or underwriter, such as lying or omitting information to secure more favorable loan terms.

For something to be considered mortgage fraud, intent matters. Honest mistakes can—and do—happen during the mortgage process. But if you’re deliberately trying to deceive your lender, or if you fall prey to a scam from an unethical loan officer or a disreputable foreclosure-rescue company, the intent is what makes it a crime.

Common Types of Mortgage Fraud

Before diving into specific examples, it’s helpful to know that many mortgage fraud schemes are considered origination fraud. This simply means the fraud happened during the mortgage application or approval process, whether it’s a borrower misrepresenting information or a professional manipulating the file behind the scenes.

Knowing what to look for can help you identify mortgage fraud and take extra precautions.

Borrower-Related Mortgage Fraud Risks

Borrower-related mortgage fraud occurs when borrowers provide false or misleading information to qualify for a loan and loan terms they otherwise wouldn’t get. In some cases, borrowers do this unknowingly. Here’s what it could look like:

• Misrepresentation of income, assets, and debt: If you “round up,” overstate, or inflate your income to qualify for a mortgage, that’s fraudulent. It’s also illegal to claim you have any funds, savings, or gifts that aren’t actually available, including temporarily moving money into an account to appear more qualified. Additionally, all debts must be disclosed.
• Occupancy fraud: This type of origination fraud occurs when you claim that you’ll live in a home, but you actually intend to use it as a rental or investment property.
• Straw-buyer schemes: You’d be considered a “straw buyer” if someone asks to use your name, credit, or other financial information to get a mortgage loan. If the goal is to deceive a lender, it’s considered fraud, even if the borrower didn’t understand the implications beforehand.

Scams and Insider Mortgage Fraud for Profit

Insider mortgage fraud and scams for profit occur when industry insiders manipulate the lending process to unfairly take money or equity from homeowners or lenders. This could look like:

• Appraisal fraud: Typically committed by appraisers, real estate agents, investors, or property flippers, this fraud happens when a home’s value is intentionally inflated or deflated to manipulate the loan amount, sale price, or profit.
• Foreclosure scams: These target distressed homeowners who may be at risk of losing their homes. The scammers make false promises of “relief,” saying they can save your home, sometimes with the help of a third-party investor or other program. They can then charge you high upfront fees, trick you into signing over your title, or involve you in an illegal transfer. You could lose money, your property, and any remaining home equity.
• Identity theft: Scammers sometimes use stolen personal information to apply for mortgages or open home-related credit lines. If you were a victim of this, chances are you’d only learn about it when you receive the bill or notice.
• Professional loan application manipulation: An unethical loan originator or officer could modify income, debt figures, or other details about you without your knowledge during the loan origination phase.

Mortgage Fraud Red Flags

Here are some warning signs of mortgage fraud:

• Demands for upfront fees for loan modification (something legitimate providers are generally prohibited from charging)
• An appraisal that’s much higher than recent comparables in your local housing market
• Pressure to sign documents without a full explanation or ample time to review them
• Inconsistencies in your loan documents
• Unsolicited contact from a service claiming to help with your mortgage or rescue you from foreclosure
• Directions to make your mortgage payments to anyone other than your lender or servicer

When you know what to look for, it’s much easier to take a step back, ask questions, and avoid becoming a victim of mortgage fraud.

How To Avoid Mortgage Fraud

Knowing what mortgage loan fraud looks like is helpful, but there are also ways to be proactive about protecting your finances and your home.

• Work with a real estate attorney: Real estate attorneys are experienced in mortgage transactions and can help you spot red flags.
• Monitor your credit reports: Regularly checking your credit report will alert you to any unauthorized inquiries.
• Review documents carefully: Don’t sign anything until you’ve had time to review it and comfortably understand the terms.
• Don’t respond to unsolicited offers: Ignore any advertisements or communication from anyone or any service claiming they can modify your loan for an upfront fee.
• Only work with trusted, accredited professionals: Research any lenders and other financial institutions you may be working with. Check their professional accolades as well as reviews from other borrowers like you.

How To Report Mortgage Fraud

Reporting mortgage fraud as soon as possible is crucial. If you’ve discovered you’re the victim of a mortgage fraud scam or suspect one is underway, you can report it to your mortgage lender, the Federal Trade Commission (FTC), and the FBI (specifically, the Internet Crime Complaint Center).

Mortgage Fraud Penalty: How Serious Is It?

The punishment for mortgage fraud can be severe for perpetrators. In addition to steep fines, restitution, and probation, perpetrators convicted under federal law face up to 30 years in prison. The severity of these penalties depends on the defendant’s level of involvement in the crime, previous criminal history, the complexity of the scheme, and other factors.

Victims of mortgage fraud don’t always face criminal penalties, but they also don’t come away unscathed. You could face financial ruin, severe credit damage, and the loss of your home. That’s in addition to the stress and time you have to sacrifice to the situation.

Final Thoughts: Staying Alert to Mortgage Fraud

Being aware of mortgage fraud, what it can look like, and how to protect against it can help give you peace of mind when it comes to protecting your home. Working with a trusted lender like Freedom Mortgage can help protect you, your home, and the investment you’ve made in your future.

If you’re ready to move forward on your homebuying journey, get prequalified today with Freedom Mortgage to see your options.