Mortgage fraud is a devastating crime that can cost you your money, your credit score, and even your home. Criminals take advantage of the fact that many homebuyers aren’t experts about mortgage rules.
The best defense is good knowledge and preparation. Here’s what you need to know about the most common mortgage fraud schemes around today.
What is mortgage fraud?
Mortgage fraud is a home loan that is based on false information. Someone in the loan transaction lied about information, forged documents or otherwise cheated to create unfair terms for the loan. Both borrowers and lenders can commit mortgage fraud.
When borrowers commit fraud, it’s often in the form of a lie that makes their loan application look better because they could not qualify otherwise. For example, Steve finds his dream home on the market and all he needs is the home loan. He would have qualified but suddenly lost his job. Steve takes one of his old pay stubs and alters the dates to make it look like he is still employed.
What Steve did is a federal crime. Altering loan application documents can lead to criminal charges and mortgage fraud penalties. Always be honest on your mortgage application.
On the lender side, mortgage fraud is more harmful. Unscrupulous professionals in the loan industry may try to overcharge borrowers or steal their money. There are many ways for this type of fraud to happen but let’s look at a few common mortgage fraud examples.
Mortgage fraud cases
Falsified information – Many people who work in the mortgage industry are motivated to help you get your mortgage because that’s how they’ll earn their commission. However, you are only supposed to qualify if you meet the required standards. If a dishonest mortgage professional thinks you won’t qualify, he or she may forge your financial information without your knowledge. For example, by reporting your income as $5,000 a month when it is really only $2,000.
When you qualify for a mortgage that you cannot reasonably afford, you are set up to fail. But even if you become unable to keep up with the payments down the road, no one involved in the mortgage process will have to return their commission. (That’s a big issue that was discussed extensively but never really addressed on a national level after the housing market crash of 2008.)
Appraisal fraud – When you buy a house, you should pay a fair market value. This is a price that matches similar properties in the area. When you get an appraisal, the appraiser should give you a good idea what the house is worth.
Some mortgage professionals inflate the appraisal and say the property is worth more than its true value. Perhaps the seller wants you to overpay, or the lender wants you to obtain a bigger mortgage, or the appraiser believes higher prices will bring repeat business from the real estate agent. Consider obtaining your own independent appraisal in addition to the one solicited by the lender.
Mortgage relief fraud – If you fall behind on your mortgage payments, criminals will know you’re getting nervous and maybe a bit desperate. They send out offers saying that they can renegotiate your mortgage to much lower monthly payments. They say they will handle the entire process for you and guarantee success, in exchange for a large upfront fee. This is a scam because you should not be required to pay an upfront fee for a legitimate refinance. In a legitimate refinance, you’ll be given the option to build the fees into the new loan.
Foreclosure scam – Here’s a type of scam that is similar to mortgage relief fraud but even sneakier. If you are close to losing your home to foreclosure and also having credit problems, a criminal may say he can save your house if you transfer the property title to him. Since he has a much better credit score, he can qualify for lower mortgage payments. He may represent himself very professionally.
He says you will still be able to live in your house and pay rent, usually at a much lower rate than the mortgage. The agreement is that he will return the title to you once you have fixed your credit problems. He never makes the mortgage payments, but instead just steals your money. The original lender still forecloses on the property and by then the criminal is long gone.
Mortgage fraud red flags
A good rule of thumb with any mortgage is if it sounds too good to be true, it probably is. If anyone tells you that you can qualify for mortgage rates that seem impossibly low, be very suspicious. If you have a mortgage and are struggling with the payments, be especially cautious. Criminals love to target distressed homeowners.
When you apply for a mortgage, understand everything you sign. Never let a lender rush you through an application or sign something you don’t fully understand. Review every page for accuracy. Errors can creep in accidentally as well as by unscrupulous professionals. Fill in all blank spaces with “n/a” if no information pertains so that no one can add information after you sign.
Look at the title history of a property before buying to see if it has been repeatedly sold over the past few years. This is one way criminals push up the appraised value before dumping a property on an unsuspecting buyer.
Work with established professionals who have a good reputation. Get referrals from people you know and trust. Check the professional’s credentials with the state and local regulatory agencies in your area. Finally, never pay fees in advance for mortgage services. This is not necessary and a big sign of trouble.
How to report mortgage fraud
If you think you are a victim of mortgage fraud, report the crime to the authorities. You should contact your local police department, your local FBI office, the FTC, and your local district attorney about the problem.
When you are reporting mortgage fraud, you will need to provide all the information you can about the incident like the names of criminals, their contact information and address, a timeline of everything that happened, copies of any documents from your mortgage loan, and any phone logs, emails, and letters from the criminals.
You should also contact the credit rating agencies to place a freeze on your credit report. The criminal may already have all of your private information and if they were willing to commit mortgage fraud, they may attempt to use it in some other fraudulent way. A credit freeze is the best way to stop thieves from opening new credit accounts in your name.
Unfortunately, getting your money back from criminals can be difficult. Civil suits and small claims court are two options, but many criminals are hard to catch and pin down.
Hopefully, it doesn’t come to this because the best solution for mortgage fraud is to never become a victim in the first place. By keeping this advice in mind and watching out for these types of mortgage fraud, you can protect yourself against this ugly financial crime.