What Is Mortgage Fraud?

Mortgage fraud is a deliberate act to deceive a mortgage underwriter, lender, or borrower in the process of buying, funding, or insuring a mortgage loan. Both borrowers and lenders can commit mortgage fraud, either to gain ownership of a property or to steal from lenders or homeowners. Mortgage fraud is a serious crime with potentially severe consequences, so it’s important to know how it works and what you can do to avoid it.

Types of Mortgage Fraud

There are several ways that mortgage fraud can occur. Here are some of the most common ones to watch out for:

Occupancy Fraud

Mortgage lenders typically offer lower interest rates and down payment requirements to borrowers who intend to occupy the home they’re buying. With occupancy fraud, loan applicants deliberately misrepresent their intended use of the property, saying they’ll reside in the home when they really plan to rent it out.

Straw Buyer Fraud

This form of mortgage fraud occurs when an individual—real estate professionals call them “straw buyers”—applies for a mortgage to buy a property on behalf of someone else. The straw buyer agrees to occupy the home and make the payments, but it’s really the other person who intends to occupy the home and pay the mortgage.

Home Appraisal Fraud

Home appraisal fraud occurs when a home is fraudulently inflated beyond its actual value. A higher home appraisal usually leads to a higher home price and more cash for the home seller. Appraisal fraud is particularly common in property flipping, where a home is purchased below the market value and immediately resold at a profit with an inflated appraised value.

Income Fraud

As the name suggests, this type of fraud involves a borrower or mortgage professional reporting inaccurate income information to get a better deal or a bigger loan. It can also include falsifying income documents in an attempt to qualify for a mortgage loan the borrower otherwise may not get.

Asset Rental Fraud

With this type of fraud, a borrower may rent or borrow assets from other individuals to make it appear as though they’re more qualified for a mortgage loan than they actually are. Once the mortgage closes, they return the assets they rented or borrowed to the original owner.

Foreclosure Scams

In this type of mortgage fraud, scammers contact homeowners who may be falling behind on payments and offer help in an attempt to avoid foreclosure. The scammer may ask the homeowner to put the property in their name and offer to make the payments for a homeowner in exchange for rent payments to their company. However, they don’t actually make the mortgage payments, and the home goes into foreclosure anyway.

What Is the Penalty for Committing Mortgage Fraud?

Mortgage fraud is a serious offense and can lead to prosecution and even jail time. Under U.S. federal and state laws, mortgage fraud can result in up to 30 years in federal prison and up to $1 million in fines, with specific consequences depending on the details of the crime. As a result, it’s crucial to take steps to avoid mortgage fraud in all of its forms.

How to Avoid Mortgage Fraud

There are several steps you can take to avoid committing or becoming a victim of mortgage fraud, including:

Be Honest

When it comes to reporting your financial information, including your income and assets, provide only accurate information. While it’s perfectly acceptable to borrow money or receive a gift from a friend or family member for a down payment, disclose the details of the loan or gift to your lender for full transparency.

Work with Reputable Professionals

If possible, try to get referrals for realtors, brokers, and other professionals from people you know and trust. Additionally, take some time to research the professionals you’re working with to determine whether you’re comfortable working with them.

Thoroughly Review All Loan Documents

You’ll get a lot of disclosures throughout the mortgage process, and while it’s tempting to skip the fine print and sign them, take your time to read everything to ensure that all the information is accurate.

Avoid Aggressive Mortgage Professionals

Try to avoid loan officers, mortgage brokers, or real estate agents who push you hard to sign documents or make decisions you’re not ready for.

Consider Working with a Real Estate Attorney

Many states require homebuyers to hire a real estate attorney for the closing process. But even in states where it’s optional, you may consider hiring one to review all of the paperwork and look out for red flags. They typically charge $150 to $350 per hour.

Get Your Credit Ready for a Mortgage Loan in Advance

Long before you start the mortgage process, it’s important to prepare your credit. Start by checking your credit score to evaluate your credit health and reviewing your credit report for potential areas you can improve. Additionally, focus on paying all of your bills on time and limiting large purchases—particularly on credit cards—and avoid taking out new credit for other purposes. While your credit history is just one piece of the mortgage underwriting puzzle, it can have a significant impact on your ability to get approved and the terms you qualify for.

Contact O1ne Mortgage for Your Mortgage Service Needs

At O1ne Mortgage, we are committed to helping you navigate the mortgage process with ease and confidence. Whether you’re a first-time homebuyer or looking to refinance, our team of experienced professionals is here to assist you every step of the way. Call us today at 213-732-3074 for any mortgage service needs. Let us help you achieve your homeownership dreams while ensuring a smooth and fraud-free experience.