Mortgage Fraud: What It Is and How to Spot It

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Mortgage fraud is a crime which involves intentional misrepresentation or omission of material information from a mortgage application; it can also involve any party employing deceptive means to mislead homeowners, buyers or sellers. While mortgage fraud might not sound like something that impacts everyday homebuyers or homeowners, it’s something that every homeowner and buyer should be aware of.

Mortgage Fraud: 6 common scams

From foreclosure rescue schemes to appraisal fraud and wire transfer scams, instances of mortgage fraud are widespread, especially when it comes to targeting the elderly and desperate. Here are common scams to beware, signs of a scam and what to do if you’re a victim of one.

Real estate wire transfer scam

Don’t trust every email you receive. If you’re in the market to buy a home, you may receive an email seemingly from your realty office asking you to wire transfer your down payment. However, that email may be fraudulent and part of a real estate wire transfer scam.

Scammers can hack into a real estate office’s email system and direct buyers to wire transfer their down payment into an offshore account that has no relation to the actual deal.

There are a few signs you can look for that could warn you that this is potentially a scam. First would be noticing any changes in the personality of your realtor in the email, such as overfriendliness, less friendliness than normal or unusual urgency. Another sign is poor grammar and spelling or emails sent at odd hours.

Avoid becoming a victim: One easy way to avoid being a victim of this scam is to refuse to use any wire transfer information that isn’t given to you in person by your real estate agent. If this isn’t practical, you can call the real estate office using the number from a business card or website (not the number in the email).

Home Appraisal Fraud

A home appraisal lays the foundation for the price of a home. So if the appraisal is artificially inflated through fraud, it can increase the price of the home and the resulting loan.

A fraudulent appraisal might include information about square footage, renovations, and home features, such as fireplaces and pools, that is inaccurate.

Avoid becoming a victim: Make sure to work with a licensed or certified appraiser. If possible, work with a lender that arranges the appraisal so that it’s unrelated to the realtor or seller.

Predatory Loans

Predatory lending is when a mortgage provider encourages a borrower to lie on their application or to borrow more than is reasonable to repay. Signs of predatory lending include being asked to provide lenders with false information or documents or to omit information. Being told you can afford a mortgage with a payment that doesn’t seem like it will fit in your budget also qualifies for this kind of scam.

Avoid becoming a victim: Never lie, misrepresent or omit information from loan documents. When buying a home, work on a budget that outlines a reasonable amount you can afford for a payment so that you know what your limits are.

Illegal Property Flip

Would-be flippers investing in a new property also need to be on the lookout for scams. In an illegal property flip scam, the appraised value of the property is artificially inflated, resulting in a higher-than-reasonable price to the flipper.

When the seller of a property focuses on using other flips as examples of comps, it’s a warning sign. Another warning sign of this scam is when the seller arranges the appraisal.

Avoid becoming a victim: Before buying an investment property, look at the home’s history through the property appraiser’s website and see how much the seller bought it for and compare the comps of similar properties (not flips). You can also get a second opinion on the value by hiring your own licensed or certified appraiser.

Foreclosure Rescue Schemes

Scammers have many ways of preying on homeowners with a property that’s in or headed toward foreclosure. In some schemes, a “specialist” requests payment to help the owner avoid foreclosure, yet provides no actual service to stop or slow the foreclosure.

In another scheme, homeowners are convinced that transferring their deed into another person’s name will save the home. The scammers then sell the property, often boosted by a fraudulent appraisal, and take the sale proceeds.

A third scheme involves adding fees and payouts that were not previously agreed upon to the closing disclosure — these can include consulting and negotiating fees.

If a foreclosure specialist tells you to avoid contacting your mortgage servicer, tries to convince you to put the deed in another party’s name, or advises you to sign over the deed and pay rent for the home, you may be dealing with a scammer. Another warning sign is a previously undisclosed fee popping up on the disclosure.

Avoid becoming a victim: When you’re struggling to make payments on your property, talk to your lender to arrange any kind of mortgage modification or refinance or to get a referral to a government program. If you’re approached by someone who says they are working with a government program, call the Homeownership Preservation Foundation’s hotline to verify (888-995-4673).

Short Sale Fraud

When your mortgage payments are behind, a short sale offers a way to sell the home quickly and avoid foreclosure. Short sale fraud occurs when the person or entity negotiating the short sale sells the property to an affiliate at an artificially low cost, with the plan to immediately resell it at a profit, ultimately profiting off of your need to quickly untangle yourself from the home.

If you get a short-sale purchase offer that’s far below market value or if you’ve been asked to agree to amounts and terms without your mortgage servicer’s awareness, then it might be a scam.

Avoid becoming a victim: Use a real estate professional to help you with the deal and stay in communication with your mortgage servicer.

How to avoid accidentally committing mortgage fraud

There’s more to mortgage fraud than the schemes above, perpetrated by scammers. According to the FBI, mortgage fraud is comprised of any material misrepresentation, misstatement, or omission that influences a lender’s decision to issue a mortgage. This definition means there might be situations in which home buyers could perpetrate mortgage fraud, without even realizing it. Let’s look at two examples.

Straw buyers

If a friend or loved one asks you to take out a mortgage in your name for a home that they will live in and pay for, it may sound as harmless as cosigning — but it isn’t. In fact, it’s a scheme called straw buying and is considered fraud. In some cases, you may be asked to cosign a loan, but when it’s time to sign documents, only your name appears on them. This situation is referred to as a sponsored straw.

Avoiding this fraud: Whenever you take a loan out for a property, make sure the lender knows exactly what the purpose of the home is, whether you will be living it, flipping it or renting it out, and never allow another buyer or organization to use your name or credit details for a property you aren’t buying. If you agree to cosign for someone, make sure that they are on the documents.

Silent Second Loan

Another way that you can unknowingly commit fraud, as either buyer or seller, is through a silent second loan. In this scenario, a seller takes out a second mortgage and uses it to lend the buyer the funds to pay the down payment on the property without disclosing that to the lender.

Avoiding this fraud: Talk to your lender about legal down payment assistance programs you might qualify for.

Detecting common signs of mortgage fraud

The fraudulent schemes listed above are just a handful of the situations you need to watch out for. Some more general signs of mortgage fraud include:

  • Being asked to falsify or omit information on any loan documents
  • Dealing with an aggressive lender that makes you feel too pressured to read what you’re signing
  • Receiving loan documents with blank areas, terms you haven’t agreed to or incorrect information
  • Being told to stop making mortgage payments directly to your lender or servicer, and instead send them to a third-party
  • A specialist asking you to pay an advance fee for a mortgage modification
  • Seeing previously undiscussed terms on the closing documents
  • Being asked to provide financial and personal information to a person or company you’re unfamiliar with

What to do when you’re a victim of mortgage fraud

If you are the victim of mortgage fraud, there are two steps you should take immediately:

  1. Report the fraud to:

  2. If you think that a scammer has taken information, consider locking or freezing your credit to prevent them from identity theft.

Even if you can recover funds lost to mortgage fraud or scams, the damage done to your psyche through the resulting stress, anxiety and depression can be much harder to overcome. Preventing these adverse effects can be as simple as watching for signs of fraud to avoid getting drawn into a scam.

Comments and Questions

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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