All Types of Mortgage Frauds

types of mortgage frauds

In the world of real estate financing, various types of mortgage frauds are a major concern for both borrowers and lenders. These fraudulent activities not only result in financial losses but also have severe legal consequences.

Whether you’re taking out a conventional mortgage loan for a primary residence or an investment property, you need to stay vigilant and aware of the potential mortgage fraud schemes that exist. But sometimes, it can be difficult to differentiate between legitimate and fraudulent activities. Even the most honest borrowers can fall prey to these schemes, resulting in devastating consequences.

That’s why we have created this guide to help you understand the different types of mortgage fraud and how to protect yourself from them.

What Is Mortgage Fraud?

Mortgage fraud refers to a scheme designed to deceive and manipulate borrowers, lenders, or other parties involved in a loan transaction. They often involve misrepresentation of information, falsification of documents, or illegal actions to obtain financial benefits.

Generally, the types of mortgage frauds are divided into two overarching categories: opportunistic and large-scale. Opportunistic frauds are one-off, small-scale activities that target individual borrowers or lenders. On the other hand, large-scale mortgage frauds involve a network of individuals and multiple properties.

What Are the Types of Mortgage Frauds?

person falling victim to a mortgage fraud

Any act that aims to deceive a party in the loan application process can be considered a form of mortgage fraud. Let’s take a look at the schemes that you could encounter when financing a home or investment property.

Lender/Title Company Representative Impersonation

This is the most common type of mortgage fraud that borrowers encounter. It involves someone impersonating a legitimate lender or title company representative to obtain personal and financial information from the borrower.

For example, a fraudster may pose as a lender and contact you, claiming that your mortgage rates can be reduced if you provide personal data, like your social security number. They can then use your information to commit identity theft or sell it to other criminals.

Equity Skimming

In this situation, the perpetrator takes ownership of a property with no intention of making payments and uses it to generate illegal gains. This scheme typically involves targeting homeowners who are experiencing financial difficulties, such as bankruptcy.

The fraudster offers to take over your property and its outstanding mortgage, promising to make payments on your behalf. However, they do not make any payments and instead collect rent from tenants or resell the property for a profit. This scheme can result in significant losses for homeowners and may even lead to foreclosure.

Mortgage Qualification Manipulation

Mortgage qualification manipulation is a type of fraud that involves exaggerating or falsifying financial information to qualify for a loan. This scheme usually targets borrowers who don’t meet the standard income and credit requirements for a mortgage.

The scammer may inflate your income, understate your debt, or provide false employment details to make you appear more qualified than you actually are. In some cases, they may also create fake documents, such as tax returns or bank statements, to support the fabricated information.

This type of mortgage fraud can have severe consequences for borrowers. If your financial situation isn’t accurately reflected in your loan application, you may end up with a mortgage that you can’t afford. This could lead to default, damaging your credit and financial stability.

Foreclosure Scam

This scam usually targets homeowners who are struggling to make their mortgage payments and facing potential foreclosure. You’ll be offered help to keep your home by negotiating with the lender on your behalf or promising to get rid of your mortgage entirely.

However, scammers committing this type of fraud often ask for upfront fees and then disappear without providing any services or results. They may also convince you to transfer the title of your property to them, claiming that you can rent it back or buy it at a later time. In reality, they have no intention of helping you and take ownership of your home.

Foreclosure rescue scams can be financially devastating, especially if you’re already struggling with your mortgage payments. Not only do you lose money, but you also end up losing your homes as well.

Inflated Appraisal for Flipped Properties

While flipping houses isn’t illegal, it can become a fraudulent activity when the appraiser inflates the value of the property to earn a higher commission. This type of mortgage fraud has become increasingly common in the real estate market, especially with the popularity of home renovation and house flipping shows.

Appraisal fraud occurs when an appraiser intentionally overestimates the value of a property to help the seller secure a higher sales price. This can happen in two ways: one, the appraiser may collude with the seller to inflate the appraisal, and two, they may manipulate comparable properties used as a basis for comparison.

For example, the appraiser could use sales of similar properties in the area that were not renovated to justify a higher appraisal value, even though the property may not be worth as much. This inflated appraisal can lead to you paying more for the property and potentially getting into financial trouble down the line.

Mortgage Rescue Scam

Similar to foreclosure rescue scams, mortgage rescue scams target homeowners who are facing financial difficulties. The fraudster promises to help you modify your loan terms or refinance your mortgage to lower payments and save your home from foreclosure.

However, instead of helping you, they may use the information you provide to steal your identity or sell it to others. They may also charge high upfront fees and disappear without providing any services, leaving you in a worse financial situation.

Air Loan

In this type of fraud, a fake broker would create a false loan to purchase a non-existent property. A borrower would then be allowed by the fraudster to use their fake loan to acquire the said property. This, however, doesn’t involve any real estate or properties. This is often carried out by a group working together to deceive the borrower.

Air loans can lead to significant financial losses for borrowers as they end up paying mortgage payments on a property that doesn’t exist. It’s essential to thoroughly research and verify any loan offers before committing to them.

Builder Bailout

This occurs when a developer or builder artificially inflates the value of properties in a new development to secure financing for their project. The builder may offer you incentives—such as cashback or upgrades—when purchasing properties in the development. They may also provide false information to appraisers, such as inflated sales prices or fraudulent comparable properties, to make the properties appear more valuable. As a result, lenders may approve loans for these properties that are much higher than their actual worth.

Builders may also use straw buyers to purchase multiple properties in the development and artificially inflate demand and prices. This type of fraud causes a domino effect, with lenders approving more loans based on the false demand created by the builder. For you as a buyer, it leads to overpaying for a property and facing financial difficulties later on.

Advance Fee Scheme

A lot of homebuyers fall into the trap of paying advance fees for their loans. But actually, reputable mortgage lenders and brokers don’t charge these types of fees. As a standard, the fees for loans are paid at closing, and usually, it’s a percentage of the total loan amount. If you ever encounter a lender or broker asking for a fee before closing, it should be considered a red flag.

In some cases, scammers will ask for an advance fee to guarantee a loan or secure better terms. They may also claim that this fee covers the cost of a credit check or appraisal. However, they have no intention of providing any services.

How Do You Prevent Mortgage Fraud?

person detecting a mortgage fraud

With due diligence, you can help protect yourself from falling victim to mortgage fraud. Here are some tips to keep in mind.

1. Check the lender or broker’s website for signs of unprofessionalism.

The first thing you can do to detect mortgage fraud is research the company offering you a loan. Check their website and look for any signs of unprofessionalism, such as spelling mistakes or broken links.

If they have limited information available, it may be an indication that they’re not a legitimate business. You can also search for reviews or complaints about the company online to get a better idea of its reputation.

2. Ask for references and referrals of all involved parties.

Apart from reading reviews, make sure to do your research on the lender, broker, and any other parties involved in the transaction. Ask for references and referrals from people you trust, such as friends or family who have recently purchased a home.

3. Verify the property’s title history and tax assessment records.

To ensure your loan application goes without a hitch, it’s essential to verify the property’s title and tax assessment records. This will help you confirm that the seller is the rightful owner of the property and that there are no outstanding liens or taxes on it.

For example, if you’re taking out a debt-service coverage ratio (DSCR) loan for a vacation rental property, you want to make sure that the seller indeed owns the property and that there are no hidden debts or ownership disputes.

4. Review all loan documents carefully before signing.

Before signing any loan documents, read through them carefully and ensure that they accurately reflect the terms you have agreed upon with your lender or broker. If something seems fishy or unfamiliar, ask for clarification and seek legal advice if necessary.

5. Seek the help of a mortgage attorney.

If you have any doubts or concerns about the loan process, it’s always best to seek the help of a qualified mortgage attorney. They can review your documents and provide legal advice to protect you from potential fraud.

Remember, if an offer seems too good to be true or makes you feel uncomfortable, trust your instincts and don’t hesitate to walk away from it. With these tips in mind, you can avoid falling victim to mortgage fraud and secure a legitimate loan for your property!

Is Mortgage Fraud a Felony?

Mortgage fraud is a serious crime and can result in felony convictions for those involved. Both state and federal governments have laws in place to prosecute individuals or groups who commit mortgage fraud. Depending on the severity of the offense, perpetrators may face fines, imprisonment, or both.

Some common charges related to mortgage fraud include wire fraud, bank fraud, mail fraud, and conspiracy to commit fraud. These charges carry severe penalties, including up to 30 years in prison and fines of up to $1 million.

Reporting Mortgage Fraud

If you suspect that you have been a victim of mortgage fraud, or if you witness any suspicious activity related to a home loan, it’s crucial to report it immediately. You can contact your state’s Office of the Attorney General or the Federal Bureau of Investigation (FBI) to report the incident.

Work with a Reputable Broker Now!

Remember—staying informed and vigilant is key to avoiding all types of mortgage frauds. Now, if you’re looking for a mortgage broker that you can trust, look no further than us here at the Mortgage Shop! We have a team of experienced brokers who can guide you through the loan process and help you make the best decisions for your financial future.

Contact us today and start your journey toward stress and problem-free home ownership!

Brenna Carles

Brenna Carles

I help people who want a place to call their home, where memories can be made, and stories to be shared. Where i can help clients build generational wealth for years to come. I provide the perfect combination of southern hospitality and relentless knowledge and passion for mortgage lending as if you were family.