Fraud is forging all over the United States. In the fiscal year of 2020, nearly 65,000 cases of mortgage fraud were reported to the U.S. Sentencing Commission. The median loss for these offenses totaled almost 1.1 million dollars.
Mortgage fraud cuts across all demographics and income groups. Whether you are looking to receive or lend a mortgage, you must be wary of all types of mortgage fraud.
What exactly is mortgage fraud? What are the main types, including those committed by lenders? What are some signs of it that you can spot as you are trying to close a deal?
Answer these questions and you can keep your money and title to your property safe. Here is your quick guide.
What Is Mortgage Fraud?
Financial institution fraud (FIF) is any criminal scheme that involves important financial institutions. A person may try to defraud a bank, credit union, or mortgage broker. A classic example of FIF is embezzlement.
Mortgage fraud is a special type of FIF. Some jurisdictions may charge someone with FIF, but others specify mortgage fraud charges.
The lender or borrower may commit mortgage fraud. On rare occasions, both may cooperate to commit a criminal offense.
Types of Mortgage Fraud
There are many kinds of mortgage fraud out there, and it is impossible to document every type. But there are some mortgage fraud categories that you can keep in mind.
Fraud for Profit
Fraud for profit is the main type of mortgage fraud that lenders and real estate professionals commit. The lender may look for borrowers who are in financial distress. They then offer a loan modification service that they say helps pay a loan back.
But this service may charge high commissions and produce little results. In some cases, the lender may pocket the money without performing any work.
Equity skimming is another type of fraud for profit. An investor approaches a homeowner who has defaulted on their mortgage.
They tell the owner they will help them, as long as they receive the title to their house. They say that this will act as “security” so they can make a new loan.
But the investor then refinances the property, taking all of the equity in it. They then leave the area, forcing the homeowner to deal with foreclosure.
Air loans are imaginary loans. A mortgage broker will fill out paperwork that claims to describe a real loan. In reality, the property described in the document or the borrower does not exist.
A broker who works for a major mortgage company may do this to meet their quotas. They can also create an air loan to convince a potential lender. They can hand over the document as a reference for their supposed experience.
Individuals may commit transaction fraud in a few different ways. Straw buying involves using a fake buyer with good credit to purchase a property. The fake buyer then transfers the deed to the actual buyer.
Some people may buy a property so they can flip it. This is legal, but many criminals looking to launder their money do this.
A buyer and seller may make an agreement on a property. The seller sells the home at a low price, and the home then qualifies for a large mortgage. This allows both parties to make some extra money.
Income fraud is the most common kind of fraud amongst borrowers. They lie about how much income they have so they can qualify for a mortgage. They may make up sources of income, even producing fake check stubs and work references.
Homeowners commit occupancy fraud. Someone may buy a house, saying they intend to make it their primary residence. A mortgage broker may then extend them a loan with a low down payment.
But the buyer then uses the home as a rental property. Most brokers extend mortgages with high down and interest rates to rental properties because renting is a high-risk activity. A buyer can defraud the broker out of thousands of dollars.
The opposite can also occur. A buyer may state that they are purchasing the property as a rental, which can qualify them for a mortgage. They then use the house as a primary residence, defrauding the broker.
Mortgage Red Flags
You do not have to fall into mortgage fraud, whether you are a lender or borrower. Lenders should carefully examine the work and financial history of any potential borrowers.
It is not enough to call the phone number of a work reference. A lender must go the extra step and see if the company the borrower claims to work for exactly exists.
They should talk to the borrower about what they plan to do with their property. If their stories are inconsistent, the lender should not extend a loan.
Borrowers should look into the history of their potential lenders. If no one can vouch for the lender’s authenticity, they should not make a deal with them.
Any deal that is too good to be true is certainly false. Refuse any arrangement that you think is suspicious, even if a lot of money may go your way.
Read the terms of your contract carefully. There should be no payouts to third parties, including contractors. Addendums that seem unusual are classic signs of a scam.
How to Dodge Mortgage Fraud
There are too many types of mortgage fraud. Fraud for profit can include equity skimming or fake loan modification services. Air loans are imaginary deals created for deception.
Transaction fraud can involve fake buyers or money laundering. Income fraud is when a borrower lies about their income level. They can also commit occupancy fraud, misrepresenting how they will use a property.
Both parties should check the other’s credentials. If the other side’s history seems fraudulent, they should walk away.
You can send scammers scramming if you know the facts. Follow our coverage for more fraud guides.