Mortgage Fraud: Preventing Identity Theft and More During the Mortgage Application Process

Buying a home can be a complex process – especially if it’s your first time. The stockpile of loan paperwork alone can be daunting. It’s safe to say that there’s a lot to keep track of. So staying organized – and vigilant – will not only help de-stress the home buying process, but it can help protect you from mortgage fraud.

Mortgage fraud has, unfortunately, been on the rise – usually raising its ugly head during economic recessions – and instances of it have more than doubled between 2019 and 2020.^[1]

Fortunately, there are steps you can take to spot mortgage fraud and avoid it. Keep reading to learn more about mortgage fraud and what to watch for when you’re buying a home.

Mortgage Fraud, Explained

Mortgage fraud takes many forms, sometimes overlapping with identity theft and various scams. It happens when a borrower, lender or industry professional deliberately misstates, misrepresents or omits information regarding a property or a mortgage. Sometimes home buyers get inadvertently caught up in a fraudulent situation because they were acting on advice from an industry professional.

When professionals in the housing or finance industries commit fraud, it’s known as fraud for profit. 

When borrowers commit mortgage fraud, it’s known as fraud for property. Borrowers typically commit this type of fraud to gain or maintain control of a property. 

Fraud for profit

Industry insiders, such as mortgage bankers, attorneys, escrow officers, loan originators and appraisers, are the usual suspects in fraud for profit schemes because these schemes require special knowledge or access.

Industry professionals steal money or equity by misusing the mortgage lending process. A common type of fraud for profit occurs when loan originators use loan modification scams to defraud homeowners facing foreclosure.

Fraud for profit is a federal crime that is typically investigated by the FBI. 

Fraud for property

Also known as fraud for housing, fraud for property is usually committed by borrowers. A borrower might lie about their income or assets on their mortgage application to qualify for a loan they may not otherwise qualify for. 

They might even persuade an appraiser to falsify a home’s property value or withhold material details about the property to complete a purchase.

This type of fraud can be perpetrated by home buyers or investors who plan to flip a home for profit.

Why people commit mortgage fraud

People commit mortgage fraud to gain something they can’t gain legally. 

Industry insiders who commit fraud for profit do it for the money. To maximize their profits, they’ll misrepresent financial information in a transaction for a bump in their sales commissions or their investment position. 

Borrowers commit fraud for property to buy or keep real estate.

A prospective home buyer may feel like they won’t be approved for a loan or get a loan with favorable terms unless they lie on their application. In the case of a homeowner facing foreclosure, they may commit fraud to be able to stay in their home. 

Common Types of Mortgage Frauds and Scams

Different mortgage fraud schemes prey on different participants in the mortgage process, but they all aim to cheat people of their property or money.

Some of the most common mortgage frauds and scams are identity theft, occupancy fraud and appraisal fraud. But there are several other mortgage fraud schemes you should be on the lookout for.

Property flipping fraud

Property flipping (purchasing a home, fixing it up and reselling it) isn’t fraudulent or illegal. Fraud happens when a buyer purchases a home below market value and sells it quickly, often to a straw buyer (who is aiding in the scheme), working with an appraiser who artificially inflates the property’s value despite a lack of improvements on the property.  

Once the sale closes, the straw buyer gains possession of the property but purposefully stops paying the mortgage. This leads to a foreclosure on the property. Meanwhile, the flipper walks away with a profit and provides a kickback to the straw buyer for their role in the scheme.

Occupancy fraud

Interest rates for owner-occupied housing are typically lower than interest rates for commercial or rental properties.

Knowing this, a buyer will state on their mortgage application that they intend to live in the home but use the home for other purposes, like a short-term rental.

In another version of occupancy fraud, a straw buyer will claim they intend to live in a home to help the real buyer qualify for lower interest rates. But as you might have guessed, the straw buyer has no intention of living in the home. 

The straw buyer purchases the property under their name while the real buyer stays behind the scenes until it’s time to move into the home. The real buyer then typically makes the mortgage payments, though the straw buyer could make the payments and get reimbursed by the real buyer.

Identity theft

Identity theft happens when a buyer steals someone else’s identity for financial gain.

An identity thief may steal or falsify a victim’s Social Security number, birthdate, addresses, bank records, tax returns, pay stubs and job information to get a mortgage.

Air loans

This scam is typically perpetrated by mortgage industry professionals. A loan is obtained on a property that doesn’t exist (think: created out of thin air) for a buyer who (sometimes) doesn’t exist. Once the loan is approved, they get to walk away with the lender’s cash.

Appraisal fraud

This scheme typically involves an appraiser working with another real estate professional, such as a loan officer, builder or real estate agent.

An appraiser inflates a property’s value to increase the amount of commission everyone involved in the scam gets. Appraisers may even undervalue properties to help unqualified buyers qualify for a mortgage.

Asset rental

Asset rental occurs when a loan applicant temporarily rents or borrows a friend or family member’s assets to qualify for a mortgage. Once the borrower is approved for the mortgage, they return the loaned assets to their rightful owners.

Equity skimming

An investor will work with a straw buyer to pull off this complex mortgage fraud scheme. The straw buyer usually gets approved for a mortgage using falsified income information.

After the sale closes, the straw buyer quitclaims the property (read: gives up their rights to the property) to the investor. The investor rents out the property and collects rent, but never makes a mortgage payment. The scam lasts until the property is foreclosed on.

Foreclosure scams

Homeowners who are in foreclosure or at risk of foreclosure are usually willing to do just about anything to save their homes. Scammers posing as “foreclosure rescue” will exploit that vulnerability to persuade frightened homeowners to transfer their properties into their names while they falsely reassure them they can help them keep their home.

The scammers turn around and sell the property, often with the help of a fake appraisal, and walk away with the proceeds.

In another enraging version of this scheme, scammers convince homeowners to pay rent on their properties for a year, promising they’ll be able to repurchase their homes at the end of the year. But, of course, that’s not true. The scammers never make mortgage payments on the homes and pocket the rent. The homeowners usually end up in foreclosure anyway. 

Income fraud

This fraud for property scheme involves a borrower lying about their income to qualify for a mortgage. This typically happens with alternative income verification loans. These loans are designed for self-employed borrowers whose tax returns often don’t accurately reflect their income.

If a borrower’s employment can’t be confirmed or their income doesn’t match their bank statements, those are typically red flags for income fraud. 

Predatory lending

A predatory mortgage lender will lend a borrower more money than they can afford to repay, usually at excessively high interest rates. The lender usually gets a fake appraisal and encourages the borrower to lie about their income. 

The Penalty for Committing Mortgage Fraud

Mortgage fraud can be prosecuted at the federal or state level. The FBI, which has been ramping up its investigation of mortgage fraud since around 2007, considers it a serious crime. 

Depending on the size of the fraud, it may be pursued as a misdemeanor or a felony.

Penalties – which typically include jail time and heavy fines – vary from state to state. In some cases, perpetrators may be required to make restitution to the people they defrauded.

Real estate professionals, including mortgage lenders, appraisers and real estate agents, may lose their licenses and their jobs.

At the federal level, the penalties for mortgage fraud are fairly severe and include jail time and significant fines. In a wide-ranging corruption scheme, someone convicted of mortgage fraud could face up to $1 million in fines and restitution and up to 30 years in prison.^[2]

How To Prevent Mortgage Fraud

As a prospective home buyer, you can exercise simple precautions to keep yourself – and your personal and financial information – safe from mortgage fraud. 

• Hire an attorney: Real estate attorneys understand how your transaction is supposed to work and should spot any red flags right away. Ask your attorney to explain every document you have to sign.
• Review the property tax assessment rolls: Your county recorder’s office keeps full public records of every property transaction. Use those records to research the value of the property you want to buy. Look at how often and how recently the property has been sold. Lots of recent activity could be a signal that the property has been flipped and may have an inflated value.
• Don’t sign incomplete documents: Your real estate documents should have every line filled in. Don’t sign documents with blank spaces and make sure any information matches your expectations. Your attorney can review all your documents to help safeguard you from fraudulent activity.
• Check your credit report: If you got caught up in a fraudulent real estate transaction, keep an eye on your credit report. Look for accounts you don’t recognize. They could be signs of fraudulent activity. Ask to speak to a fraud resolution agent at a credit agency (Equifax®, Experian^TM or TransUnion®) if you have concerns.
• Ask for help if you’re facing foreclosure: Homeowners become understandably distraught when their home is under the threat of foreclosure. Before agreeing to any kind of foreclosure workaround with a third party, explore your options with your lender. They may offer forbearance, loan modifications, revised payment plans or refinancing to lower your monthly mortgage payments.
• Ask for the title history: A title search will confirm the rightful owner of the property you’re purchasing and determine whether the chain of title is clean. It will also reveal whether the property has unpaid property taxes or homeowners association fees.
• Be honest about what you can afford: We get it. It’s tempting to want to make yourself look good on a mortgage application by inflating your income or other numbers just a touch. But you’ll need to resist the temptation to manipulate any numbers or agree to borrow more money than you need to buy a home. Otherwise, you may end up spiraling into debt over a monthly mortgage payment you can’t afford. 
• Ask for referrals and check references: Check out the credentials of every real estate professional you work with during the home buying process. Ask friends and family for referrals and scour reviews. Verify all licenses and dig deeper if any red flags pop up for you.
• Avoid pushy lenders: Any mortgage lender who’s aggressive about getting you to agree to a loan is likely bad news. And if any lender suggests lying on a loan application – walk out the door and look for a new lender.

Dot Your I’s and Cross Your T’s

Staying extra vigilant over every aspect of your real estate transaction is one of the best ways to help protect yourself from a variety of real estate fraud.

And here are a few other tactics: Pay attention to the warning signs, trust your gut and work with professionals referred to you by people you trust.

With the right combination of organization and vigilance, especially when it comes to your loan documents, you’ll be in a better position to safely complete your home purchase.