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What Is Mortgage Fraud?

Mortgage fraud occurs when a potential homebuyer or mortgage lender provides false information or omits certain details in order to complete a mortgage transaction. As a homebuyer, you may encounter predatory lenders who want to scam you. And if you’re in a tight spot, you may be tempted to do whatever it takes to secure a loan. But know that the penalties for mortgage fraud are severe. We can show you how to avoid these schemes. And if you’re financial situation needs improvement, we can help you find a financial advisor who will work with you to improve your credit report so you can land a decent mortgage with favorable rates and terms.

Who Commits Mortgage Fraud?

Mortgage fraud can be divided up into two main categories: fraud for housing and fraud for profit. Fraud for profit usually involves the folks who play a role in handing out loans. These can include mortgage brokers, lenders, lawyers and home appraisers.

By contrast, fraud for housing typically happens when potential homebuyers attempt to get mortgage loans using inaccurate or misleading information about their financial backgrounds.

Although there are different forms of mortgage fraud for housing, the term generally refers to securing a loan in a dishonest manner. Maybe someone applying for a mortgage deliberately left out certain information that could have made it harder to get preapproved for a mortgage. Or maybe he or she fudged the numbers in order to make the application seem more appealing. These sorts of practices are illegal. If caught, the perpetrator could face some hefty mortgage fraud penalties.

Fraud laws differ by state. Mortgage fraud can count as either a misdemeanor or a felony. Perpetrators run the risk of facing 30 years in prison and paying a $1 million fine if convicted of a felony through a federal court.

Types of Mortgage Fraud

Now that you understand what mortgage fraud is, it helps to be able to recognize some of the various scams that can occur. The following are some common ones to watch out for:

Appraisal Fraud

This scheme is often a team effort. A group of mortgage professionals (appraisers, real estate agents, etc.) can collaborate to make a home seem like it’s worth more than it actually is. The people involved in the scam can earn more money with a higher sale price and sellers can pocket more dough.

In Cincinnati, a loan processor pocketed almost $400,000 after inflating appraisal values and devising fake companies to sell properties.

Air Loans

These kinds of loans are literally made up out of thin air, just as their name suggests. Brokers can draw up a loan for a home or building that doesn’t exist, using the names of made-up borrowers. They might even go so far as to try and trick those who look into the loans by inventing phone numbers, employees, addresses and appraisers. In the end, fraudsters can potentially walk away with hefty sums gained from these fake properties.

Occupancy Fraud

Occupied homes tend to come with a perk that isn’t available to buyers of homes that won’t be owner-occupied: lower interest rates on mortgages. In this specific scheme, someone trying to secure a mortgage loan might pretend that he or she is planning to move into the home to avoid paying more interest.

Identity Theft 

mortgage fraud

In regard to mortgages, identity theft takes place if someone who wants to buy a house steals another person’s personal information in order to get approved for a mortgage loan.

Illegal Property Flipping 

Say you want to get into real-estate investing. You could buy a house, fix it up and sell it to make money. This is known as house flipping, and it’s completely legal. Illegal property flipping, however, happens when an investor buys a home and then sells it using a fraudulently high appraisal value or by including fictitious details on documents for the mortgage loan.

Loan Modification Schemes 

These scams often target homeowners struggling to keep up with their monthly mortgage bills by requiring them to pay extra fees. In exchange, borrowers are promised help (that they actually never receive) with adjusting the loan’s terms in their favor.

Foreclosure Rescue Schemes 

If you find yourself having to go through a foreclosure, it’s a good idea to be wary of people who claim that they can assist you by putting their names on your house deed and making your mortgage payments for you until you can get your act together. You might lose your home if the trickster suddenly occupies it, sells it to make a profit or neglects to make any payments on it, allowing it to go into foreclosure.

How to Avoid Mortgage Fraud

The list of schemes goes on and on. Besides being aware of the ways that mortgage fraud can be committed, it’s important to know how to avoid being a potential victim of these traps.

First and foremost, do some research before choosing a mortgage lender or real estate agent. If you can, it might be best to get a referral from a friend or neighbor who can verify that the mortgage professional is trustworthy and has the credentials needed to put you on the path toward home ownership.

Once you choose a lender, it’s a good idea to read over any paperwork before signing or paying for anything. Doing things like double-checking personal details, making sure you fill in all of the blanks and asking follow-up questions can ensure that you know exactly what you’re getting yourself into. And as a general rule, if a deal seems too good to be true, it probably is.

The Takeaway

mortgage fraud

Mortgage fraud has become more common. When it happens, it threatens the whole housing market and prevents individuals from enjoying the home-buying experience. The FBI has taken strides to investigate mortgage fraud and make the public more aware of it by working with local groups and police units. You can protect yourself from fraud by fully understanding the terms of your mortgage and only agreeing to work with a professional whose credentials you have checked.

Tips on Avoiding Mortgage Fraud

  • The best way to avoid falling victim to a predatory mortgage lender is to verify the organization’s credentials. You should also ask questions about any fees, closing costs, interest rates and payment terms involved.
  • You should never engage in mortgage fraud no matter how bad your financial situation is. There are several ways to improve your credit score. You can also work with a qualified professional to clean up your entire financial picture. A fiduciary financial advisor is legally required to always work in your best interest. If you’d like some guidance, you can use our financial advisor matching tool. After answering a few questions about your goals, you’ll be linked with up to three advisors in your area. You can review their profiles and set up interviews before deciding to work with one.

Photo credit: ©iStock.com/g-stockstudio, ©iStock.com/Witthaya Prasongsin, ©iStock.com/fizkes

Amanda Dixon Amanda Dixon is a personal finance writer and editor with an expertise in taxes and banking. She studied journalism and sociology at the University of Georgia. Her work has been featured in Business Insider, AOL, Bankrate, The Huffington Post, Fox Business News, Mashable and CBS News. Born and raised in metro Atlanta, Amanda currently lives in Brooklyn.
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