Mortgages are one of the most common ways to get a new house. You get money from the bank and invest in your home. So far, so good. Well, getting a new house as an investment (or as a main home) is good news; however, knowing how to prevent mortgage fraud is just as important.
While insurance covers a lot of different aspects, it doesn’t serve as mortgage fraud protection.
What Is Mortgage Fraud?
Mortgage fraud is a grave, illicit activity where an individual intentionally misrepresents or omits information on a mortgage application to obtain a loan that would likely not be approved if the true information were known.
Perpetrators of such deceits often provide misleading information about income, debt, or property value, impacting both lenders and unwitting homeowners. Mortgage fraud prevention is crucial to safeguard consumers and the financial market from substantial risks and loss.
Efforts to avoid mortgage scams include rigorous validation of documentation, enhanced due diligence, and consumer education on diverse fraud schemes, like equity skimming and property flipping. But we’ll talk about it later.
First off, let’s see why people do it.
Why Do People Commit Mortgage Fraud?
People commit mortgage fraud primarily for financial gain, exploiting loopholes and vulnerabilities in the mortgage lending process. They may be driven by economic pressures, the desire for a better living situation, or the intention to profit illicitly through schemes like property flipping and equity skimming.
Types Of Mortgage Fraud
You can’t protect yourself from mortgage fraud until you know the most common types and the “cures” for them. So, without further ado, we’ll go through the main ones.
False Identity
Mortgage fraudsters frequently use false identities to deceive individuals during the mortgage process.
Examples of these tactics include identity theft, fake bank accounts, applications with incorrect or fraudulent information, and other misrepresentations related to an individual’s background.
This is why it is important when applying for a mortgage loan to be sure you are working with a reputable lender that has been authorized by federal law enforcement agencies such as the Federal Trade Commission (FTC).
Asset Rental
Asset rental fraud is a type of mortgage fraud where loan applicants borrow or rent the assets of others to make themselves appear more qualified for financing. The nasty scheme could include false documents like bank statements and W-2 forms that show much higher income or access to a more considerable cash balance than the individual actually has, as well as fake employment history records, all done to demonstrate job stability.
For example, an applicant could rent luxury cars and other items that they do not own in order to claim luxury lifestyle credentials on their application form, obtain credit cards with high limits through fraudulent means, and even make claims about personal funds abroad without having any real knowledge.
Inflated Appraisals
Inflated appraisals involve deliberately raising the value of a property during an appraisal process. The goal is to secure either a larger loan amount or extract more equity from the property by making it appear worth more than it actually is.
Such mortgage fraud often occurs in connection with flipping schemes, where properties are resold at an artificially inflated price. To do this, fraudsters may use fraudulent appraisals as well as altered loan documents that increase buyer incomes and misrepresent other factors and values involved in securing a loan.
Equity Skimming
Equity skimming is another popular mortgage fraud. How is it done? Scammers obtain a mortgage loan in the name of a property owner without their knowledge or consent. It often occurs when a homeowner is behind on taxes or payments and unknowingly agrees to take out an illegal second loan as part of a foreclosure prevention tactic.
Fraudulent appraisals are then used to overvalue the property, creating a phantom equity that allows scammers to extract more money from the loan than what really exists within the home’s worth.
Foreclosure Scams
Foreclosure scams often prey on financially vulnerable people who need help with an unexpected hardship. Scammers pose as mortgage loan auditors, foreclosure prevention auditors, lawyers, or other experts and promise to save homeowners from foreclosure – which can seem like a lifeline for these desperate individuals.
For example, they may claim that they are providing legal assistance to help negotiate significantly lower payments or provide a reverse mortgage in exchange for payment upfront – neither of which is legitimate services nor will it result in any actual changes to the homeowner’s financial situation.
Occupancy Fraud
Occupancy fraud occurs when a borrower lies about the occupancy status of a property to mortgage lenders. Commonly, borrowers falsely claim they will live in the property as their primary residence when it is actually an investment or rental.
In addition to being illegal, occupancy fraud often comes with other malicious forms of mortgage dishonesty, such as application fraud and false identity theft.
Property Flipping
Property flipping is the practice of purchasing properties and quickly reselling them for a profit. In many cases, this type of real estate investment activity is legal when done in connection with traditional purchases.
However, property flipping can become fraudulent when a property is purchased below its market value and then quickly resold at an inflated price; this kind of scheme often occurs within distressed markets where values are declining rapidly.
The key risk factor associated with engaging in property flipping scams involves taking a loss on the purchase if it turns out that the loan taken fails to cover all original costs associated with acquisition and renovation, as well as closing costs and other expenses related to the sale.
Mortgage Fraud Risk Factors
When you have to evaluate the risk factor of mortgage fraud, you should understand that anyone can become a victim. Many smart people are also deceived. Everyone can get tricked, which is why you shouldn’t underestimate the potential threat.
Therefore, being vigilant and educating yourself on common schemes is essential in protecting against mortgage fraud.
One risk factor relates to verifying the legitimacy of lenders and mortgage professionals before proceeding with any property purchase, especially when dealing directly with private parties instead of more established providers.
It’s also critical to know enough about all steps in the home buying process so you have an accurate understanding of what needs to happen along each step, as verification by third-party sources (e.g., loan officers).
Always remain highly skeptical until confirmation from multiple trusted sources has been made, and never provide personal/financial information unless you feel confident that it won’t be used fraudulently against you later on down the line.
How To Avoid Mortgage Fraud And Report It?
Mortgage fraud poses extremely high risks to potential homebuyers and the whole real estate market. To shield yourself against deceptive practices, you need to take some critical steps. Below, we’ve provided some pivotal guidelines to fend off mortgage scams and ensure secure, transparent property transactions.
Thorough Documentation Review
Before finalizing any agreements, scrutinize loan documents meticulously. Misleading details or terms that appear excessively favorable may indicate fraud. A clear understanding of every clause is fundamental to avert potential traps and future disputes.
Verification of Lenders
Confirm the legitimacy of brokers or lenders by requesting credentials and conducting independent checks. This step is crucial to avoid falling prey to sham transactions or fraudulent lending schemes that can lead to significant financial loss.
Identity Verification of Contacts
Verify the identities of all parties involved to protect against scams such as air loans. In such deceptions, nonexistent funds or services are promised, and fees are collected without providing any valid contractual obligations in return.
Proactive Research and Inquiry
Ask questions and research diligently to detect and avoid fraud. Observing anomalies like unexpectedly high appraisals for unimpressive properties can expose tactics used in equity skimming, where rent is collected without settling the actual mortgage payments.
Seek Professional Guidance
When in doubt, consult reputable attorneys or financial advisors knowledgeable in local real estate regulations. Professional advice is especially valuable in navigating complex transactions and protecting against occupancy fraud targeting first-time homebuyers and vulnerable populations.
How Can Radaris Help?
Radaris is a people search site that can assist individuals in protecting themselves from mortgage fraud. The platform lets people access detailed information about potential collaborators and service providers to ensure they are not involved in suspicious behavior or activities related to mortgage fraud.
With our huge database, Radaris allows users to compare multiple profiles and cross-reference addresses, social media accounts, employment histories, financial records, and even more.
It may help homeowners identify any potential deceptive schemes attempted by other parties who intend to commit mortgage fraud.
Yet, we do have to warn you that you cannot use Radaris as the sole proof to protect against mortgage fraud. However, it’s great for cross-checking.
Conclusion
Mortgage fraud is underestimated by many – but it’s an evergreen scheme. Many desperate people fall victim to deceiving individuals, but it’s just them – anyone can catch the bait if they receive an irresistible offer to sell their home or refinance their mortgage with much lower interest rates.
And while no one can provide you a 100% warranty, we from Radaris advise you to always think twice, and if someone or something seems too good to be true, more often than not, you’ll be on the losing side.
FAQs
How Do People Get Caught by Mortgage Fraud?
Individuals usually get trapped by mortgage fraud through deception, misinformation, and overly attractive offers that seem legitimate but are structured to deceive and exploit.
Who Most Commonly Commits Mortgage Frauds?
Typically, mortgage frauds are committed by fraudulent borrowers, corrupt real estate agents, and organized criminal groups.
What Are the Primary Red Flags for Mortgage Fraud?
Several red flags can indicate mortgage fraud. Discrepancies in the documents raise suspicion. A mismatch between the buyer’s income and employment details is alarming. Rapid property flips also raise eyebrows. Large, unexplained wire transfers or deposits may signal fraud.
Is Mortgage Fraud Hard to Prove?
Yes, in most cases, fraudsters are very experienced at clearing their traces, so you may need a private investigator or special agents to trace the scam.
How to Protect My Property From Mortgage Fraud Schemes?
The most important thing is not to trust unknown people. Whether you want to refinance your debts or sell your property, you would better pay more and work with professionals than put your home into the wrong hands.
