What Is Mortgage Fraud?

Mortgage fraud occurs when either borrowers or lenders provide misleading information on a mortgage application. 

According to a 2023 CoreLogic report, mortgage fraud occurs across all property types. Since the second quarter of 2022, mortgage fraud on property purchases with two to four units increased by 23%, while fraud for jumbo mortgages and jumbo refinances increased by 3% and 7%, respectively. Could you unknowingly be caught in mortgage fraud? Unfortunately, yes. 

However, if you do your homework and provide accurate information, it's unlikely. Read on to understand what mortgage fraud is, and how to avoid it. 

What Is Mortgage Fraud?

Any deliberate act of providing misleading or false information while applying for a mortgage loan is fraud. Both borrowers and lenders commit mortgage fraud. In simplest terms, lying is fraud, and lying on a mortgage application is fraud and can have serious financial and legal consequences.

According to the United States Sentencing Commission, 58 mortgage fraud offenders were sentenced in the federal system in the 2021 fiscal year. While that's a small number, actual cases could be much higher. Borrowers could commit mortgage fraud by inflating their net worth, savings, or down payment Fraud can be driven by a desire for profit or property, and In either case, it is illegal. Here's how those two motivations differ:

Fraud for Profit

Fraud for profit, as the name implies, is driven by a desire to use mortgages to earn a greater profit. It is often perpetrated by industry insiders, including appraisers, mortgage brokers, bank officers, attorneys, loan originators, and any other mortgage industry professionals, who may use their specialized knowledge or authority to commit fraud. This is the most common type of fraud that is investigated and prosecuted by the FBI. 

Fraud for Property

Fraud for property, unlike fraud for profit, involves an illegal misrepresentation to secure or maintain homeownership. For example, a borrower might lie about their assets, income, or other financial information. In a variation of fraud for property, borrowers may try to entice an appraiser into manipulating a property's appraised value in their favor.

Different Types of Mortgage Loan Fraud

Mortgage fraud takes various forms based on motivations of money or property ownership. All forms are illegal. Here is what to look out for:

Assets Rental

Asset rental is an elaborated version of asset falsification. It occurs when a borrower deliberately tries to inflate their assets to get mortgage approval by “renting” someone else's assets. The goal is to get approved for a mortgage or get better terms before returning the assets to the owner.

Receiving a gift from a friend or family member to help with a mortgage down payment is legal, and isn't considered asset rental as long as there are no stipulations about repayment. You'll need a gift letter stating their intention to give it to you, and that you are under no obligation to pay the gift back. For example, if your grandparents give you $20,000 for a home down payment shortly before your mortgage application, they can also write a gift letter to include with the application. 

Equity Skimming

Equity skimming is a blatant criminal offense. If someone buys a home with no intention of living in it or repaying the mortgage, it's equity skimming. They may rent out the property and collect the rental income until the lender forecloses on the property.

Property Flipping

If you're a fan of house-flipping reality TV shows, you might wonder why house-flipping made the list. Legitimate property flipping involves buying and renovating a property before reselling it. 

Property flipping as a mortgage scam occurs when a borrower buys a home, makes minimal or no renovations, and then tries to quickly resell the home for more than it's worth. If a new buyer often tries to get a mortgage based on the inflated value, the loan's value could exceed the property's value. This is called a negative loan-to-value ratio, putting the borrower at greater risk of default and the lender at greater risk if they have to collect on the loan. 

Inflated Appraisals

Appraisers may intentionally overstate the value of a property, allowing the borrower to obtain a larger mortgage loan than the property is worth. Sometimes, the appraiser might work with the borrower, the lender, or someone else who can benefit from the inflated appraisal. Other times, a borrower may attempt to bribe or coerce an appraiser into overvaluing a property. 

False Identity Usage

In case of identity theft, scammers may apply for a mortgage with the stolen identity. They may use someone else's Social Security number or create entirely fictitious identities with forged documents. 

Foreclosure Scams

Foreclosure scams target homeowners facing foreclosure, promising to help them keep their homes if they pay upfront fees or transfer the property's title. The scammers pocket the fees or equity without providing any assistance, leaving homeowners in an even worse situation. 

How to Prevent Mortgage Fraud

To prevent mortgage fraud, diligently verify the information and reputation of anyone you choose to work with during the mortgage application process, from lenders to appraisers. To protect yourself, aim to:

• Check reputations: Verify the credentials and reviews of all professionals you work with throughout the home buying process. 
• Understand everything you sign: If you don't understand something, consult a real estate attorney to ensure you're clear on the documentation before signing. 
• Don't fall for ultralow offers: If someone approaches you with a lower mortgage offer or other “too good to be true” opportunity, don't trust it. Do your homework and compare rates from reputed lenders. 
• Report fraud: If you suspect fraudulent activity, you can report it through the Federal Trade Commission. 

How to Report Mortgage Fraud 

If you suspect mortgage fraud, report it promptly to the authorities. Here's how:

• File a complaint with the Federal Trade Commission (FTC) through their website or by calling 1-877-382-4357. 
• You can also report mortgage fraud to the Department of Housing and Urban Development (HUD) Office of Inspector General (OIG) online or by calling 1-800-347-3735.

What Is the Penalty for Committing Mortgage Fraud?

The penalty for committing mortgage fraud depends on the type of fraud and the seriousness of the offense. However, the best defense is to avoid committing fraud altogether. The financial and legal consequences can include substantial fines and prison sentences, plus the repayment of any stolen funds. 

Mortgage fraud can be prosecuted as a federal crime under laws such as the Fraud Enforcement and Recovery Act (FERA) or the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA).

Protecting Yourself from Mortgage Fraud

You can never take mortgage fraud too seriously when it comes to avoiding being unintentionally caught in a mortgage fraud scheme. To protect yourself, work with certified, well-reputed professionals. Don't be afraid to ask questions, do your research, and carefully compare offers. And be especially careful of unsolicited offers for low-cost mortgages or refinancing. To get started working with legitimate mortgage lenders, learn more about mortgage preapproval and then find the best online mortgage lenders. Then, find the best current 15 and 30-year mortgage rates to compare with your offers. 

Frequently Asked Questions