Mortgage fraud is a serious crime and it can be a major threat to your finances, regardless of which side of it you’re on.
Mortgage fraud refers to a homebuyer lying or exaggerating details on their application to increase their odds of approval on a mortgage loan or to secure a lower interest rate.
But that’s not the only definition: Mortgage fraud also includes crimes when the mortgage borrower is the victim — for example, foreclosure rescue schemes or reverse mortgage scams in which bad actors try to steal money or home equity.
While homebuyers are often the perpetrators of mortgage fraud, it can also be committed by pretty much anyone involved in the real estate business or the mortgage industry, including sellers, builders, investors, real estate agents, mortgage brokers, lenders and third parties who offer fake services.
The Federal Bureau of Investigation (FBI) is responsible for investigating many types of mortgage fraud cases and focuses on schemes run by fraudsters that hurt consumers.
Here’s everything you need to know about mortgage fraud and how to avoid it:
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Common types of mortgage fraud
Mortgage fraud can be broken down into two categories: Fraud committed by mortgage borrowers (often to secure homeownership) and for-profit fraud schemes that prey on borrowers.
Here are some of the different types of mortgage fraud:
Mortgage application fraud
This is one of the classic types of mortgage fraud. Mortgage application fraud refers to borrowers deliberately misreporting their income, assets or debt to lenders and loan servicers.
Application fraud can mean not disclosing credit card debt, a car loan or another mortgage to your lender.
It may also involve doctoring documents or lying on forms to overstate your income, thereby improving your chances of loan approval. In some cases, borrowers come up with fake jobs at fake companies.
This can lead to severe financial consequences, including foreclosure and damage to your credit, if you end up with a mortgage you're not financially capable of paying off. It's also illegal, punishable by up to 30 years in prison and fines up to $1 million.
Mortgage occupancy fraud
Mortgage occupancy fraud means misrepresenting your intent for the home you’re buying to be your primary residence.
Why would someone do this? It’s because lenders usually consider investment properties a higher risk: If it comes down to it, borrowers are likely to continue making payments on the place where they mainly live and fall behind on the payments on the second home.
As a result, mortgage rates are higher for investment properties where you don’t reside at least half the year. It can also be more difficult to qualify for a loan on an investment property, and you may need a larger down payment. But lying to a lender about your plans to live in a home can be a felony, and it’s always a bad idea.
Straw buyer schemes
It’s generally illegal to buy a home on behalf of someone else and not disclose it in the mortgage process.
This type of mortgage fraud usually involves a more qualified borrower (the “straw buyer”) putting their name on the loan application when the intent is for a less qualified person, perhaps a friend or a relative, to actually reside there.
The resident, who may have a low credit score or inconsistent income, would usually give money to the straw buyer to pay the mortgage.
In this type of fraud, the buyer gets a second loan to pay for the down payment. They don’t disclose the second loan to the lender, and in the lender’s eyes, it looks as if the borrower invested their own money in the down payment.
Foreclosure rescue scams
Moving on to scams that target mortgage borrowers, foreclosure rescue scams prey on borrowers facing financial distress. There are several different types of these schemes, but the gist of them is that scammers offer to “help” a borrower facing foreclosure, but the assistance isn’t real. Victims are then at risk of losing equity in their home or paying for fake services. And they may still end up going into foreclosure because the promise of “rescue” was fake.
Reverse mortgage scams
A reverse mortgage is a way for Americans 62 and older to tap the equity in their homes. Unfortunately, it creates opportunities for fraudsters. Reverse mortgage fraud is when a scammer tricks an older homeowner to take out a reverse mortgage and then steals the funds.
Note: These are just some examples of common schemes. Other types of mortgage fraud include equity skimming, illegal property flipping and home equity line of credit fraud. For more info on other schemes, the National Association of Realtors has resources.
Tips to avoid mortgage fraud
To avoid committing mortgage fraud as a borrower, the most important thing is to be honest with your lender about your financial information. If you are having trouble qualifying for a mortgage, it’s best to work on your credit, pay off your debt and increase your income.
Don’t try to cheat the system because you could end up in legal trouble and find yourself in debt on a home you can’t afford. Likewise, home sellers and their real estate agents should stay abreast of the pertinent rules related to home selling and fraud to avoid inadvertently breaking any laws.
As far as avoiding mortgage fraud schemes that prey on mortgage borrowers, it’s similar to avoiding any other type of fraud: Keep your guard up, check the credentials of lenders or any other person or entity you find yourself in contact with about your mortgage, don’t give away your personal information to the wrong people and don’t pay for services upfront.
Here are some more detailed tips, sourced from the Consumer Financial Protection Bureau (CFPB), the FBI and the Department of Housing and Urban Development:
- Be skeptical of anyone who asks you to sign over the title to your home — that’s an instant red flag.
- Protect your personal information (bank accounts, Social Security number, mortgage account login info, etc.).
- Don’t trust anyone who tells you to stop making mortgage payments or to make them to someone other than your loan servicer.
- Be skeptical of promises that you can buy a home without a down payment. (Legitimate zero-down payment mortgages are uncommon.)
- Don’t buy annuities or invest in financial products pitched by someone purporting to be your lender.
- Don’t trust strangers with mortgage lending advice.
- Have your guard up if someone is pressuring you in any way about a mortgage
- Don’t sign any paperwork you don’t understand.
- Get referrals to ensure you’re working with legitimate real estate and mortgage professionals and check their licenses.
- Don’t sign loan documents with blank fields for any monetary amounts.
- Regularly review your credit report to keep an eye out for identity theft.
- Practice good password security — that includes signing up for two-factor authentication and generating unique passwords with a password manager.
How is mortgage fraud detected?
Lenders have a strong motive to root out instances of mortgage fraud since they lose money if a home buyer doesn’t make payments because they only qualified for a loan through misrepresentation of their finances.
In the mortgage application or refinance process, lenders look out for signs of possible fraudulent activity like unrealistically high income for the borrower’s stated job.
Fraud detection software tools also help them spot mortgage fraud. With the help of these tools, lenders will try to ensure your identification documents are legitimate and they’ll cross-check the info you submit in the loan application process with other available sources. Lenders may also analyze documents to see if there is evidence they’ve been doctored or modified.
Fraud can be detected long after a loan application is approved. Lenders may decide to investigate if a borrower misses payments, for example.
Lastly, mortgage fraud can be unearthed by local or federal government agencies. Lenders are likely to be the ones to detect fraud by mortgage borrowers trying to gain access to housing.
As far as larger fraud schemes — including those in which consumers are the victims — government authorities are responsible for investigating the criminal actors.
How to report mortgage fraud
If you suspect you’re a victim of mortgage fraud or otherwise come across an occurrence of it, you can submit a report to the FBI by calling 1-800-225-5324. The Department of Justice also maintains a website with additional information if you’d like to report fraud to additional federal agencies.
Local reporting options may include contacting law enforcement or your state attorney general’s office.
FAQs about avoiding mortgage fraud
What are the different types of mortgage fraud?
Is mortgage fraud a felony?
How can I avoid committing mortgage fraud as a loan applicant?