Mortgage fraud: definition, examples and how to avoid it

What is mortgage fraud?

Mortgage fraud is when someone lies about important information on a mortgage application to get a loan or better terms. It can be committed by borrowers, lenders or other parties involved in the mortgage process.

Mortgage application fraud examples

The FBI says there are several types of mortgage application fraud to be aware of as well:

• Income fraud is when a borrower overstates their income to gain access to mortgage funds to purchase a home.
• Employment fraud is when a borrower falsely states they are employed with a specific company, or inputs a fake company name for employment.
• Disclosure fraud is when a borrower does not disclose all existing financial obligations on the application, such as car loans, credit card debt or other mortgages.
• Occupancy fraud is when a borrower falsifies who will be occupying a home, as many mortgages require homeowner occupancy to be approved.

The Federal Deposit Insurance Corporation (FDIC) also states that lenders and other financial interests may commit “fraud for profit,” where lenders collude with other parties to defraud borrowers. This can include elaborate schemes that involve “straw” borrowers, sellers, loan originators, brokers, agents, appraisers, builders and developers.

Types of mortgage fraud

While mortgage fraud can happen in a variety of ways, there are a few common types of mortgage fraud to be aware of:

Property flip (appraisal fraud)

A common type of mortgage fraud occurs when an investor buys a property at well below market value, then quickly turns around to sell the property for a much higher price. The problem is that no repairs are usually made, or issues are covered up. An appraiser who is in on the scheme then gives a falsified appraisal of the home.

As a buyer, it’s important to always look at public records before purchasing a home. If the home you wish to purchase was sold previously within a few months (or less) at a much lower price, it’s important to question the repairs made and why the price jumped. It’s also a good idea to get a trusted third-party appraisal to ensure it is valued accurately and you don’t overpay.

Occupancy fraud

Occupancy fraud is when a borrower falsifies an application for a loan, claiming that they will occupy the home after purchase. Owner-occupied homes usually qualify for home loans with better rates and lower down payments. So, unscrupulous investors may claim owner-occupancy to save money up front.

Lenders working with a potential buyer should be on the lookout for appraisals that mention expected rent payments, large down payments from a company or evidence that the buyer will be renting the home out.

Straw buyer

A straw buyer mortgage fraud scheme is when a borrower is not the true buyer of a home, but is purchasing the home (with a mortgage) for someone else. This happens when the “true” buyer can’t qualify for a mortgage, due to bad credit or other financial reasons. After the transaction is completed, the straw buyer will transfer the home’s title to the real buyer.

Pro tip

Lenders need to look out for borrowers who are very vague about their intentions with the home, and for down payments coming from an institution instead of a personal account. Unfortunately, a title transfer immediately after the home is purchased often indicates a scam.

» RELATED: Definition of title insurance

Air loans

Air loans are sophisticated scams that involve professional criminals creating a fake purchase to obtain mortgage funds. This includes creating fake property listings, borrowers, seller identities and title or insurance documentation. The goal is to get a lender to use mortgage funds to pay the “seller” directly for a transaction that never occurs.

Identity theft and income or asset falsification

Identity theft mortgage fraud occurs when a borrower uses someone else's information to apply for and obtain a mortgage for a home. This includes stolen Social Security numbers, identification, pay stubs and bank account information.

Income fraud is when a borrower falsely claims a higher income than they really have in order to qualify for a mortgage on a home they want to purchase. This may include falsifying pay stubs, asset values or hiding debts and other financial obligations.

Why commit mortgage fraud?

There are different motivations for committing mortgage fraud. People who can’t qualify for a mortgage but really want to buy a home commit mortgage fraud to get a home sooner. This is known as “fraud for housing” and typically is committed by borrowers with poor credit or who don’t have sufficient income to qualify for the home they want.

Mortgage fraud to earn money is known as “fraud for profit,” and typically is committed by professionals who collude to profit from unsuspecting buyers or lenders. This can be as simple as a false appraisal to sell a home for more or as involved as falsifying documents to get mortgage funds directly.

How to avoid mortgage fraud

Committing mortgage fraud can result in fines and even prison time.

Mortgage fraud can have huge consequences, so it’s important to understand how to avoid it at all costs. As a borrower, it’s imperative to never falsify any piece of information on your mortgage application.

This includes misrepresenting income, employment, assets or debts. You should also avoid anyone encouraging you to “rent” your credit or sign documents with blank sections or terms you don’t understand.

Tips for buyers

As a homebuyer, you can protect yourself from false appraisals and sellers inflating home values by hiring your own independent home appraiser. This ensures you get an accurate fair market value on the home you’re looking to purchase and don’t overpay (or overborrow) for the property. It’s also smart to work only with licensed real estate and lending professionals, and to review every document carefully before signing.

Tips for lenders

Mortgage lenders should always verify income and asset information through a trusted third party if possible, or get direct income information from a verified employer directly. Lenders should verify appraisals using their own trusted professionals before approving a loan.

Bottom line

To best avoid mortgage fraud, it’s important to always work with a trusted lender. If you’re unsure how the homebuying or home selling process works, take an educational class (usually offered through HUD) to educate yourself before buying or selling your home. And keep an eye on your credit report to ensure there are no unauthorized transactions on your behalf.