Mortgage fraud refers to any intentional deception or misrepresentation used to obtain a mortgage loan. Typically, mortgage fraud occurs when a prospective homebuyer either gives false information or omits significant information in the process of applying for a mortgage loan to purchase a property.
Mortgage fraud involves any false statements or misrepresentations used to obtain a mortgage loan from a lender.
The most common kinds of mortgage fraud are income fraud, appraisal fraud, and occupancy fraud.
Mortgage fraud has been on the rise since the turn of the century.
Understanding Mortgage Fraud
While mortgage fraud is most commonly associated with borrowers, unscrupulous mortgage brokers or lenders may also commit fraud in relation to mortgage lending.
Mortgage fraud’s risen significantly since the 2008 Global Financial Crisis. In some cases, the fraud may be relatively innocent. A borrower may accidentally misstate certain figures – such as their income – or fail to report significant information because they’ve forgotten about it or are not aware that it is relevant to their application for a mortgage.
In other cases, a borrower may intentionally deceive a lender, but their primary motivation is not to commit fraud for financial advantage, but merely to be able to buy a home that they want when they cannot legitimately qualify for the necessary mortgage loan.
Mortgage Fraud Examples
Mortgage fraud can occur in many different ways, but the most common incidences of mortgage fraud are some form of income fraud, appraisal fraud, or occupancy fraud.
1. Income Fraud
Income fraud is the most frequently occurring type of mortgage fraud. It consists of a potential borrower stating an income amount that is higher than they actually make. The spread of internet crime has made income fraud easier to commit, as there are websites that will, for a fee, offer services such as false verification of income or employment, forged W-2 forms, or forged tax returns.
Other fraudulent tactics include a borrower claiming self-employment income that does not exist or listing a false job title. For example, a borrower may state that they are a high-level executive at the company they work for when, in fact, they are a lower-level employee.
A variation of income fraud involves the increasingly common crime of identity theft. In these cases, a borrower obtains another individual’s financial information and uses it to obtain a mortgage loan and purchase a property.
Alternatively, borrowers may use identity theft to obtain a mortgage loan against a property owned by another individual. It’s a real shock for an unsuspecting homeowner who is unaware that they have been the victim of identity theft when they go to sell their home and discover there is a large mortgage loan on the property that they knew nothing about.
2. Appraisal Fraud
Appraisal fraud happens when the appraisal of a property that a borrower is seeking a mortgage loan on is intentionally either overstated or understated. A potential borrower must usually collude with a dishonest appraiser in order to commit appraisal fraud. While income fraud is commonly committed just to obtain a mortgage loan, appraisal fraud is often a “for-profit” scheme. A typical example of appraisal fraud occurs as follows:
The potential borrower gets an appraiser to appraise a property for more than its actual value or sale price.
The borrower is then able to obtain a mortgage loan for more than the amount necessary to purchase the property.
After receiving the loan, the borrower and the appraiser – and even possibly the seller of the property – split the excess money received that is not required for purchasing the property.
Borrowers may sometimes try to get an appraiser to understate the value of a property so that they can then get the seller to agree to sell the property for a lower price.
3. Occupancy Fraud
Occupancy fraud can occur in various ways. A prospective borrower may state that they intend to occupy a property as their primary residence in order to obtain the most favorable loan terms when they do not intend to live in the property. Loans on primary residences are typically granted with lower interest rates.
Another kind of occupancy fraud occurs when a borrower falsely claims they are purchasing an investment property that they intend to rent out, using the projected rental income to help them qualify for a mortgage loan.
Mortgage Fraud Profit Schemes
Sometimes, mortgage loan borrowers are the victims rather than the perpetrators of mortgage fraud schemes. Mortgage brokers or lenders – or other companies or individuals – may approach homeowners who are in financial difficulty with a “mortgage rescue” scam. They convince the homeowner to “temporarily” transfer the property to them, promising to make the mortgage payments on it until the homeowner can resume doing so themselves.
Rather than doing as promised, the brokers may then sell the home right out from under the actual homeowner and disappear with the profits. Alternatively, they may have charged the homeowner a fee for their services.
They pocket the fee but don’t make the promised mortgage payments, and the home eventually goes into foreclosure. Some of the most brazen scammers may then purchase the home for a much-reduced price at a foreclosure sale.
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