Types of Mortgage Fraud: How to Spot and Prevent Scams

Types of mortgage fraud

There are five main categories of mortgage fraud with different motives, methods, types of perpetrators, and legal consequences (if it’s uncovered before, during or after the fraud is committed).

Occupancy fraud

Occupancy fraud occurs when a borrower lies about living in a property as their primary residence. This lets them get lower interest rates and better loan terms meant for owner-occupied homes.

Red flags include:

• The mailing address doesn’t match the property’s
• Owning multiple homes in the same area
• The job location is far from the property address
• Very low utility usage after closing
• Unclear down payment sources

If convicted, jail sentences can range up to 30 years in prison, and fines of up to $1,000,000. Lenders should be able to check occupancy claims through utility records, any IRS documents, and property inspections.

» LEARN MORE: Types of mortgage loans

Appraisal fraud

Appraisal fraud means deliberately inflating property values, and this scam hits buyers and finance companies just as hard. This type of mortgage fraud secures larger loans or helps quick-flip schemes. Appraisers, agents and buyers can work together to manipulate values for profit.

Watch for these warning signs:

• Home value exceeds similar sales by more than 15%
• Seller or agent recommended the appraiser, not the lender
• Property sold multiple times within 12 months
• Photos in the appraisal don’t match the public records

This fraud carries harsh penalties up to 30 years in prison, and can lead to fines of more than $1 million. The severity reflects how these schemes can destabilize housing markets. That’s why it’s important to require independent verification of all valuations for deals more than $500,000.

Straw buyer fraud

Straw buyer fraud involves someone else applying for a mortgage to ensure someone else can move into the house they’re applying to buy. The straw buyer (fake buyer) won’t live in that house or make mortgage payments.

Instead, the straw buyer serves as a front for the real buyer, who, for any number of reasons, won’t be able to get a mortgage. Key signs of this include:

• Buyer unfamiliar with the property
• No intent to live there, or wants mail sent elsewhere
• Third parties provided all funds
• Borrower can't explain their job or income

Legal consequences can be up to 20 years in prison, plus fines of more than $250,000. This scheme often combines with other fraud types. Because of the complexity of this crime, investigating this could take six to 24 months to find out what happened and prove it beyond a reasonable doubt.

Home title fraud

Home title fraud occurs when criminals forge documents to transfer property ownership without the real owner knowing. The fraudster takes out mortgages against the stolen equity or even tries to sell the property to unsuspecting buyers.

Warning signs include:

• Seller only communicates by email or text
• Unexpected mail from unfamiliar companies about your property
• Unusual wiring instructions to unfamiliar banks
• Aggressive sales tactics or pressure to get the mortgage completed

Penalties include up to 30 years in prison and punitive fines of up to $1 million. Victims often discover the fraud only when trying to refinance or sell, which can happen many years later. Title insurance provides critical protection against this scheme.

Application fraud

Borrowers committing application fraud intentionally misrepresent themselves on mortgage applications to appear more qualified for loans than they actually are. Application fraud is an umbrella term that covers employment fraud, credit and liabilities fraud, identity fraud, income fraud and down payment fraud.

Application fraud signs include:

• Assets not matching stated income
• Document verification timelines are quicker than normal
• Signature styles vary across documents
• W-2s and banking statements have different mailing addresses

These types of fraud carry the same penalties as other frauds: up to 30 years in prison and up to $1 million in fines.

How to spot mortgage fraud

Detection requires checking every element in the transaction and not trusting anything without verification. Most fraud schemes leave multiple traces if you actively look for them.

Red flags by transaction stage

For mortgage officers and companies, check all applicant information against outside sources during application review. Don’t rely only on the provided documents. Verify jobs and income independently by contacting employers or tax authorities directly.

Before closing, examine properties with ownership changes within 90 to 180 days. These rapid flips often signal inflated appraisals or straw buyer schemes. Down payments of more than 30% of the property value require additional investigation into funding sources.

Monthly monitoring

Check transaction logs monthly for unusual patterns. Look for strange payment patterns and document problems or communication gaps. Professionals should train staff every 12 months on evolving fraud tactics.

For wire transfers greater than $100,000, use dual-control verification. This requires two authorized people to approve the transaction. Thankfully, this simple step prevents the vast majority of title fraud schemes that rely on rushed, unverified transfers.

If you spot two or more red flags in a single transaction, escalate it immediately. If deals close faster than the typical 30- to 45-day closing period, that’s a red flag and needs investigating.

» NEXT: Reverse mortgage scams and how to avoid them

Impact of mortgage fraud

Many fraud victims discover schemes only years later during refinancing or resale attempts. By then, damage to credit scores, property equity and legal standing can be severe.

The median losses from mortgage fraud were $371,818 in 2021. Detection after it’s happened can take six to 24 months. Early detection can help limit losses, potentially preventing or reversing the fraud and reducing the time it impacts the mortgage process.

The impact extends beyond immediate money loss. Credit scores can drop by 100 points or more after fraud. This affects your ability to get future loans for years. Property sales or refinancing can be delayed or prevented entirely during fraud investigations.

What to do if you suspect mortgage fraud

Immediate action limits damage and preserves evidence for investigation. Whenever possible, don't confront suspected fraudsters directly; let law enforcement handle that.

Immediate steps

Collect and back up all transaction documents, emails, and communication logs. Take screenshots of online records before they can be changed. Secure your account by changing passwords and implementing monitoring services.

Contact your lender or title company immediately to flag suspicious activity. Lenders need to place a credit freeze with all major credit bureaus to prevent additional activity by the same persons.

File a police report and notify the FBI Mortgage Fraud Unit, HUD Inspector General or state attorney general.

Documentation and reporting

Prepare a short summary including everyone who’s been involved, a timeline including every relevant date and specific suspicious actions. Attach supporting documents and communications. When reporting online, save confirmation of your submission for future reference.

If your property title changed without your knowledge, contact your county recorder and local police the same day. That’s why title insurance is so useful. If your lender notifies you of suspicious activity, respond as soon as you can to limit any financial risks.

Protecting yourself from mortgage fraud

Consult a real estate attorney who specializes in fraud cases. They can explain your legal options and obligations. Notify your homeowner's insurance carrier about the incident. Some policies provide coverage for certain fraud-related losses.

Consider subscribing to a title lock or monitoring service. These alert you to any changes in your property records. Keep a written log of every action taken from the moment you suspect fraud. This documentation may prove critical in legal proceedings or insurance claims.