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What is Mortgage Fraud? Types & Examples

Instructor: Ian Lord

Ian is a real estate investor, MBA, former health professions educator, and Air Force veteran.

Every year home buyers and real estate professionals alike lie or commit crimes that involve real estate mortgages. Mortgage fraud can take a number of forms, although there are consumer protections in place to minimize incidents and their impact.

Mortgage Fraud

When Dave went to sign the closing paperwork for his new house, there were a number of disclosures informing him that mortgage fraud is a crime. Dave is an honest person, but wonders what kind of activities count as mortgage fraud. Let's take a look at some of the common schemes that a person can do to commit fraud as well as some of the consumer protections in place to protect against fraud.

Fraud for Housing

As a home buyer, Dave is under a significant amount of stress over the fact that he will be unable to buy a house if he can't qualify for a mortgage. There is motivation for him to lie about his income since that is a major consideration lenders use in determining whether someone can repay the loan. In order to qualify for the loan and get the house, Dave might lie about the amount of money he makes or even about his current and recent employment history.

Let's imagine Dave is buying another house later to use an investment property. Another common scheme is to commit occupancy fraud. Since an investor is more likely to default on an investment property than his own personal residence, interest rates and standards for loan underwriting are higher on investment property loans than personal residence loans. Dave might be tempted to lie and say he intends to live in the home in order to get a cheaper loan when in fact he intends to flip or rent it.

Dave might also be approached to become a straw buyer. A straw buyer uses his own credit history and application information to qualify for a loan, but has no personal intention to live in the house or pay for it with his own money. Instead, someone else who couldn't qualify for that loan will pay Dave to get the loan on his behalf.

Fraud for Profit

In more elaborate cases, mortgage fraud can be committed with the involvement of real estate professionals. A loan officer could submit multiple fake documents, and with the aid of an unscrupulous appraiser, create a loan for a home with an inflated property value. Dave, using the fake application, gets a loan for far more than the house is actually worth, and the excess is split between Dave, the appraiser, and the loan officer.

Another aspect of mortgage fraud is criminal enterprise related fraud. Money laundering through mortgaging properties to flip is one such scheme. If Dave was a drug dealer and tried to conceal the source of his illicitly earned money through buying houses with a mortgage and reselling them, that is a kind of mortgage fraud.

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