What is Mortgage Fraud? Recognizing Common Schemes and Protecting Yourself

Mortgage fraud is a serious financial crime that can lead to severe penalties, including fines up to $1 million and 30 years in prison. For homebuyers and homeowners, understanding how to identify common schemes is the first step toward protection. This guide outlines the primary types of mortgage fraud, from occupancy misrepresentation to elaborate foreclosure scams, and provides actionable strategies to safeguard your investment and ensure your loan application remains honest.

What Constitutes Mortgage Fraud? Mortgage fraud is defined as the deliberate misrepresentation or omission of information used by a lender to fund, purchase, or insure a loan. This illegal activity, which often involves falsified documents, targets various parties in a real estate transaction, including borrowers, lenders, and sellers. These schemes generally fall into two categories: fraud for profit, typically committed by industry insiders, and fraud for housing, usually undertaken by borrowers seeking homeownership.

Common Types of Mortgage Fraud Schemes Recognizing the different forms of mortgage fraud can help you avoid becoming either a victim or an unintentional participant.

What is occupancy fraud? This occurs when a borrower falsely claims they will occupy the property as their primary residence to secure more favorable loan terms, such as a lower interest rate or down payment. In reality, the borrower plans to rent out the property or use it as a second home. For example, a buyer might use a first-time homebuyer program to purchase a multi-unit building, then rent out all units while continuing to live elsewhere.

How do foreclosure relief scams work? Scammers target homeowners facing financial hardship, posing as "foreclosure specialists" who can help them avoid losing their home. The scammer convinces the homeowner to temporarily transfer the property title, promising to improve their credit and allow them to repurchase the home later. Instead, the scammer takes ownership, may sell the property, and the original homeowner loses their equity and home.

What is equity skimming? In this scheme, a fraudster takes control of a property by convincing the owner to transfer the title, often with promises of managing the property for profit. The scammer then collects rent from tenants but makes no mortgage payments, allowing the property to fall into foreclosure. The original owner loses all equity built up in the home.

How does asset rental fraud mislead lenders? A borrower temporarily "rents" assets, such as cash, from a third party to inflate their bank account balances on loan application documents. After the loan is approved and funded, the assets are returned to their owner. This misrepresentation makes the borrower appear more financially stable than they are.

What should I know about income fraud? This involves falsifying documents, such as pay stubs or employment verification letters, to overstate income to qualify for a larger loan. A borrower who only qualifies for a $290,000 loan might create fake documents to secure a $400,000 loan, increasing the risk of default.

What is a non-arm's length transaction? This fraud occurs when parties with a pre-existing relationship (e.g., business partners or relatives) collude to deceive a lender. They might artificially inflate a property's sales price above its market value to secure a larger loan. After closing, the excess funds are split between the conspirators.

How can I identify straw buyer fraud? A straw buyer is a person with good credit who applies for a mortgage on behalf of someone who cannot qualify due to poor credit or other issues. After the transaction closes, the property title is transferred to the real buyer, who orchestrated the scam.

What is property flipping fraud? This involves purchasing a property cheaply and then quickly reselling it at a highly inflated price, often with the help of a corrupt appraiser. The buyer is left with a mortgage that exceeds the property’s actual value, known as an underwater mortgage.

How to Protect Yourself from Mortgage Fraud Vigilance and transparency are your best defenses against mortgage fraud.

Submit accurate documentation. Always provide honest, up-to-date financial information on your mortgage application. Disclose the source of any large financial gifts for your down payment to your lender. Be clear about your intended use for the property.

Review all loan documents carefully. Purchasing a home is a major decision. Read every document thoroughly, including the fine print. Ask questions about anything unclear. Pay special attention to the title search, which confirms ownership and reveals any existing liens, such as unpaid property taxes.

Work with reputable professionals. Seek referrals and check reviews for real estate agents, lenders, and appraisers. Be wary of professionals who pressure you into decisions. Based on our experience assessment, consulting a real estate attorney for the closing process, even if not required by your state, can provide an expert review of documents and uncover potential red flags.

What are the penalties for mortgage fraud? Under federal law, mortgage fraud can result in criminal prosecution, leading to fines of up to $1 million and a prison sentence of up to 30 years. A conviction will also severely damage your credit and future ability to secure any loan.

If you suspect mortgage fraud, report it to the FBI online or by calling 1-800-CALL-FBI. You can also contact the Department of Housing and Urban Development at 1-800-347-3735.