Common Mortgage Fraud Schemes

What Constitutes Mortgage Fraud?

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Borrowers can inadvertently commit mortgage fraud by confusing information, and by making mistaken omissions on their applications. But, intentional omissions and lies do occur during the mortgage application and approval process. All states have laws in place that punish this type of activity. Some states have specific laws for it, while others do not. Mortgage fraud is also a federal, prosecutable offense.

Here are a few examples of common mortgage fraud schemes:

Undisclosed Kickbacks

These are undisclosed deals between a buyer and seller that are not included in the mortgage documents. For example, if you strike a deal with a home seller that involves you receiving money to pay for a new roof and the lender is unaware because it's not detailed in the purchase contract, addendum, or estimated closing statement, that falls under mortgage fraud.

Silent Second Mortgage

This is a second mortgage placed on an asset for down payment funds but isn't disclosed to the original lender on the first mortgage. A borrower without a down payment can commit mortgage fraud by borrowing the down payment from the seller in exchange for giving the seller a silent second mortgage.

Falsifying Employment Income

Mortgage fraud occurs when borrowers overstate their income levels. Borrowers are motivated to commit mortgage fraud in order to purchase a house or maintain ownership of one. Income gets misrepresented when the borrower would not qualify or receive the higher mortgage they need.

Non-Owner Occupant Claiming Occupancy

Lenders offer higher interest rates and less favorable terms to non-owner occupants because the lender's risk is higher. In these types of cases, known as occupancy fraud, banks take on greater risk because they get a lower interest rate on the actual delinquency risks associated with tenants that may not pay. If you don't intend to live in the property, don't promise that you will. If you are subsequently found out, the penalty could be foreclosure. This is because the likely scenario would be that the lender would demand immediate payment in full of the remaining mortgage balance if you can't afford to or refuse to pay.

Down Payment Gifts You Will Repay

Both parties, the giver and the recipient, commit mortgage fraud if the gift is to be repaid. Gifts cannot be repaid. When this type of gift is repaid, it's actually a loan in disguise. When the down payment gets sourced to something other than the deposits, it should be flagged. Asset documentation is critical.

Inflated Purchase Price

If you have two purchase contracts and send the false contract with the higher sales price to the lender in hopes of obtaining a higher appraisal, it's mortgage fraud. The same is true if you put down a put down a higher purchase price on the purchase agreement than what the buyer is actually paying to the seller.

Falsifying Deposits

This is when borrowers state on the purchase agreement that a deposit was paid to the seller when in fact it was not. This could happen when the purchaser wants to obtain a bond approval. When the falsification is uncovered, the bond will be retracted and the sale will no longer go through.