Mortgage fraud can come in a variety of flavors, but one thing remains consistent: it’s all illegal. It’s important for today’s buyers to understand the different types of fraud out there in order to protect themselves from predatory lending practices, scams, swindles and other types of negligence when it comes to financing one of their largest investments.
It’s important to understand that not all mortgage fraud originates from a lender. There are many instances where buyers are perpetrators of their own fraud. This is most commonly found when a buyer lies on a mortgage application, called fraud to qualify. Typically this occurs when a buyer fabricates things like income, source of down payment, employment or intent to occupy the property.
Fraud for profit
Fraud for profit is a far more sophisticated version of mortgage fraud. It typically involves industry insiders like real estate agents, appraisers, lenders, and closing attorneys. This type of mortgage fraud comes in four very different kinds.
No. 1: Flipping
Real estate transactions in which houses are acquired legitimately prior to improvements being made, and before the house is resold are quick turns and not flips; this is completely legal. Where it becomes illegal is when sellers or shady investors lie about improvements such as their value, or to qualify a buyer. Generally flipping involves fraudulent appraisals and grossly inflated sales prices.
No. 2: Straw buyers
Straw buyers are used to hide the true borrower’s identity when the borrower does not qualify for the mortgage on his or her own. Straw buyers are front men for individuals with poor credit, and are usually duped into believing or thinking they’re investing in real estate that will be rented out in such a way that the rental payments will pay for the mortgage. However, in these cases no payments are ever made to the victim and the lender (typically) forecloses on the house for non-payment.
No. 3: Appraisal fraud
Appraisal fraud is usually an integral part of most mortgage fraud. Dishonest appraisers inflate the value of a property and usually receive a cut of the proceeds from the sale for doing so. This leaves buyers underwater when payment becomes due.
No. 4: Foreclosure schemes
This type of mortgage fraud preys on people in danger of losing their homes. It works like this: Swindlers contact homeowners in the early stages of foreclosure and say that he or she can help the homeowner get rid of his debt and save their house for an upfront fee. However, the con artist doesn’t help with anything, he merely takes the money and runs.
Mortgage fraud is serious business, carrying fines of up to $1 million dollars and up to 30 years in prison. If you suspect someone is committing fraud, or if you know someone who has been victimized by fraud, it’s important to contact your local authorities and report it immediately.