Mortgage Fraud: Definition, Examples and How to Avoid It

Mortgage fraud is a financial crime that involves someone intentionally providing false or misleading information during the mortgage lending process. Common examples include a borrower lying about their income on a loan application or an appraiser inflating a home’s value. Learn more about mortgage fraud, including its various types, and how to identify and avoid it.

What is mortgage fraud?

Mortgage fraud occurs when someone deliberately misrepresents or omits information that lenders rely on when deciding whether to fund, purchase or insure a home loan. Borrowers, loan originators and other real estate professionals can commit mortgage fraud.

The FBI categorizes mortgage fraud in one of two ways: fraud for profit, and fraud for housing. Here’s a breakdown of each type:

→ Fraud for profit. Involves industry professionals, including mortgage lenders, appraisers and brokers. Their motive is primarily profit through manipulation of the mortgage lending process.

→ Fraud for housing. Occurs when a borrower uses deceptive practices to buy a home. This may look like lying on a mortgage loan application or saying you intend to live in the property when you actually plan to rent it out.

Mortgage fraud can include (but isn’t limited to) falsifying mortgage application documents, pressuring an appraiser to overvalue a property or using a straw buyer to purchase a home you wouldn’t otherwise qualify for. We cover these mortgage fraud schemes and more in the types of mortgage fraud section below.

Types of mortgage fraud

1. Equity skimming

Equity skimming is a type of real estate fraud that occurs when an individual or group of people buy a property, often at a low price, with no intention of paying the mortgage or property taxes. Instead, they collect rent from tenants without making any improvements or repairs to the property. The purpose of this mortgage fraud scheme is to collect as much rent as possible before the property goes into foreclosure.

2. Occupancy fraud

Occupancy fraud occurs when a borrower falsely claims that they’ll reside in the property when they really intend to rent it out. This is often done to secure more favorable financing terms. For example, someone buying an investment property to rent out may falsely claim that they plan to live in the home, since interest rates and loan terms are generally better for owner-occupied properties.

3. Appraisal fraud

This involves an appraiser intentionally saying that a property is worth more or less than it actually is. Appraisal fraud may occur when a homeowner or lender pressures the appraiser to overvalue or undervalue a home in a way that benefits them. For example, a higher appraisal may help lower the loan-to-value (LTV) ratio so that a lender can approve a mortgage application that may not otherwise qualify.

4. Straw buyer schemes

A straw buyer is someone who purchases a property on behalf of someone else to keep the real buyer’s identity hidden. Straw buying often occurs when a homebuyer doesn’t meet the minimum mortgage requirements for a loan and can’t buy the property themselves. For example, a straw buyer with good credit may secure a mortgage for a person with bad credit.

The following characteristics can signal the use of straw buyers, according to Fannie Mae:

→ An entity other than the borrower makes the mortgage payments
→ The buyer doesn’t intend to occupy the home
→ The buyer isn’t represented by a real estate agent
→ The loan applicant’s income, savings and credit are inconsistent with their overall profile

5. Foreclosure rescue and loan modification scams

Homeowners experiencing financial hardship are often targeted by foreclosure rescue and loan modification scams. These scams occur when a person or company approaches you to “save” your home, usually in exchange for a fee. Generally, only your mortgage lender or servicer has the ability to offer you a loan modification — so if anyone approaches you about it, it’s likely a scam.

6. Property flipping

Flipping houses is legal in most cases. However, property flipping can be fraudulent if someone buys a home and quickly resells it for a considerable profit without making any major improvements or repairs. This type of fraud is typically committed by a house flipper and an appraiser who conspire to artificially inflate the property’s value.

How to avoid mortgage fraud

A big part of avoiding mortgage fraud is being able to recognize the warning signs. Here are some red flags during a real estate transaction that could signify mortgage fraud:

• Loan application discrepancies. As a lender, it’s crucial to review loan applications carefully. Signs of fraud can include an income that seems too high for the applicant’s job, mismatched addresses on W-2s and bank statements, altered documents or if the loan applicant has the same phone number as their employer.
• Upfront fees. Never pay an advance fee to anyone to negotiate a loan modification, refinance or foreclosure prevention option on your home. These services are available for free from counselors certified by the U.S. Department of Housing and Urban Development (HUD), and you can find a local counselor by checking the HUD website.
• Guaranteed results. If you aren’t able to pay your mortgage according to your original loan terms, there’s no guarantee you or anyone else can negotiate new terms. If a company guarantees certain results or otherwise sounds too good to be true, it’s likely a scam.
• Deed or ownership transfers. Never transfer ownership of your home to anyone else, especially if you feel pressured to do so. Contact a HUD counselor immediately if you’re unsure where to turn for help.
• Over-the-phone financial information requests. These are also called “call-spoofing” scams and involve callers stealing your personal information by impersonating a bank official, government official or someone in an authoritative position. Best advice: Hang up the phone when the personal questions start.
• Credit history inconsistencies. Lenders should be cautious of applicants with an unrealistically long credit history for their age, or a Social Security number that varies across documents or was recently issued.

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