What Is Mortgage Fraud and How to Avoid It

Qualifying for a mortgage can be difficult. If you’re concerned about getting approved, it might not seem like a big deal to slightly exaggerate your income on your application.

However, this is a type of mortgage fraud, and it could potentially land you in serious legal trouble.

What is mortgage fraud?

Mortgage fraud happens when someone deliberately lies, fakes documents, or otherwise uses deception to obtain a mortgage loan. Mortgage fraud schemes fall into two categories, according to the U.S. Federal Housing Finance Agency:

• Fraud for profit. Industry insiders (brokers, appraisers, loan officers) using their position to steal money or equity from lenders or homeowners.
• Fraud for housing. A borrower using deceptive tactics (such as misrepresenting income) or pressuring an appraiser to acquire or keep a home.

Some fraud schemes involve simple lies, and others are complex plans involving multiple people and document forgeries.

Common examples of mortgage fraud

If you’re wondering how to avoid mortgage fraud, you should start by getting familiar with the different forms it can take. These are some of the most common examples of mortgage fraud you should know:

Income misrepresentation

Homebuyers and other people involved in the mortgage industry may try to increase their odds of mortgage approval or secure better interest rates by lying about how much money they make. The simplest form of income misrepresentation is lying about annual income on application forms, but other examples include:

• Creating or using a fake business name to provide employment verification
• Submitting altered versions of actual pay stubs or tax forms
• Not telling the lender about debt obligations

Many lenders will check your data against your credit report and other sources to verify that the information you submitted is accurate. In many cases, they’re able to catch fraud in progress.

Appraisal fraud

Home appraisal is a major part of the homebuying process. A professional appraiser determines the home’s fair market value to ensure that homebuyers don’t overpay and that the home is suitable collateral for the loan.

Unfortunately, corrupt real estate agents, mortgage brokers, and appraisers will sometimes try to misrepresent the value of a home. For example, if a mortgage broker works with a corrupt appraiser who artificially inflates the value of a home, the broker may be able to generate much greater profit.

Appraisal fraud causes buyers to pay much more than they need to based on a value that was never real. If a home is appraised accurately later as part of a sale or home refinance, the homeowner may learn they’re in negative equity, owing more on the mortgage than the home is actually worth.

Identity theft

Identity theft mortgage fraud is especially dangerous because many homeowners don’t realize it’s happening until it’s too late. Criminals who use this strategy may access a homeowner’s personal information and use it to effectively steal home equity.

For example, they may use forged documents and your Social Security number to apply for a home equity line of credit (HELOC) or home equity loan, drain your equity, and never repay.

In other cases, identity thieves may create a fraudulent deed transferring your property into their name. After filing that deed with your county recorder, the criminals may try to sell your home or borrow against it. This is commonly called home title fraud.

Straw buyer schemes

If someone wants to buy a home but can’t qualify for a mortgage, they may try to recruit a family member, friend, or even a stranger to act as a straw buyer. For the scheme to work, a straw buyer must have strong credit and enough income to qualify for the desired mortgage.

In exchange for a fee, the straw buyer takes out a mortgage and falsely claims that they will be living in the home. In reality, the real buyer lives in the home and makes mortgage payments (or reimburses the straw buyer for them).

In this type of fraud, the straw buyer takes on an enormous amount of risk. Because their name is the one on the mortgage, they could face severe credit damage and debt lawsuits if the real buyer stops paying. If the scheme is uncovered, they could face felony charges and potential prison time.

Occupancy fraud

With all else being equal, someone applying for a mortgage for a primary residence will usually get a better interest rate than someone who wants to buy the home as an investment property.

Some unethical investors commit occupancy fraud to improve their interest rates. This means that when they apply for the mortgage, they falsely claim that they will use the home as a primary personal residence.

Read more >> How to qualify for a mortgage

How to avoid mortgage fraud as a borrower

As a homebuyer, you want to avoid being falsely accused of mortgage fraud. These three key tips can reduce your risk of becoming a fraud victim:

• Complete your application honestly. Make sure all information on your application is complete and accurate. If it isn’t, you could potentially be accused of mortgage fraud.
• Work with licensed professionals. Independently verify the credentials of appraisers, loan officers, real estate agents, and other professionals you work with.
• Carefully read all documents before signing. Make sure you understand any mortgage-related document you sign. And never sign a blank document.

Watch for red flags from lenders or agents

Mortgage fraud is more common than many people realize. Watch for common signs of a mortgage fraud scam:

• Offering mortgages with no credit check or guaranteed approval before you apply
• Asking you to alter or falsify documents
• Requiring you to pay upfront fees
• Pressuring or rushing you through the process
• Introducing you to third parties who then try to control your mortgage transaction

Read more >> How to get a home loan with poor credit

Red flag: No legitimate mortgage lender offers guaranteed approval or skips the credit check. Federal rules require lenders to verify your ability to repay what you borrow. If your lender isn’t following the rules, walk away.

What to do if you suspect mortgage fraud

If you think mortgage fraud may be going on, gather as much documentation as you can and take action to report it:

• Get in touch with the company issuing the loan
• File a complaint with the Consumer Financial Protection Bureau (CFPB)
• Report suspected identity theft to the Federal Trade Commission (FTC)
• If the fraud is related to a federal housing program, contact the Department of Housing and Urban Development Office of Inspector General

It can help to closely monitor your credit report for unfamiliar accounts or unusual activity.

Read more >> How to report identity theft

Strengthen your application, not your numbers

Most people misstate income because they’re worried about qualifying. Building credit is how you improve your odds without misstating anything, affecting both approval and the rate you’re offered. And on a 30-year mortgage, that rate difference can be worth thousands.

Kikoff's Credit Account reports your on-time payments to all three credit bureaus, so you can build the payment history lenders weigh most heavily. No hard credit check required.