Understanding and Avoiding Mortgage Loan Fraud
This article covers avoiding loan fraud when you buy a home.
What is loan fraud when you buy a home? There are two types of loan fraud:
- Fraud for housing (tricking a lender into approving a loan it would otherwise decline)
- Fraud for profit (stealing cash and equity from lenders or homeowners)
Homebuyers can commit loan fraud by mistake if they are not careful.
What Is Mortgage Loan Fraud?
According to the FBI, mortgage fraud involves, “material misstatement, misrepresentation, or omission relating to the property or potential mortgage relied on by an underwriter or lender to fund, purchase, or insure a loan.”
Tactic like these can seem harmless. After all, you plan to make your loan payments as agreed, so what’s the harm in fudging facts to get a loan? The problem is that by lying on a loan application, you’re causing the lender to take risks it would not take if it knew the truth. And if you ever find yourself unable to pay your mortgage, the truth will probably come out.
So avoid these activities. They may seem harmless but can get you into deep legal trouble:
- Misstating your job position or inflating your income or length of service at your job
- Stating you are a full-time or salaried employee when you are a contract, part time, hourly or commission-based employee or are self-employed
- Lying about the source of your down payment
- Purchasing a rental property and stating that you plan to live in it
- Not disclosing all of your debts
- Misrepresenting property details or omitting information in order to inflate the property value
- Adding co-borrowers who will not be living in the home and do not intend to take responsibility for the mortgage
Loan fraud is a serious offense with serious consequences. Just last week, an Associate Cook County Circuit Court judge was charged with mortgage loan fraud for lying on a mortgage application over 10 years ago.
More Examples of Mortgage Fraud
Fraud for housing usually means misleading a mortgage lender to get it to approve a loan that it would decline if it had all the facts. Mortgage borrowers might commit fraud for housing by lying or leaving out important facts on their loan applications.
For instance, if you lose your job during the mortgage process and fail to inform your lender, you’re actually committing mortgage fraud. If someone sues you, you must disclose that on your mortgage application. Otherwise, you’re committing mortgage fraud. If the income on the tax return you supply an underwriter doesn’t match what you filed with the IRS, you may be guilty of mortgage fraud.
Industry professionals are more likely to commit fraud for profit. Sometimes, a loan officer or real estate agent will “help” homebuyers get approved to buy property so that they can get their commission or loan fees. In that case, the pro is committing fraud for profit, while the buyer is committing fraud for housing.
A real estate agent might secretly loan the buyer money for a down payment. This is called a “silent second” mortgage. Because most mortgage programs do not allow buyers to borrow their down payments, this loan probably constitutes loan fraud.
A criminal loan officer might encourage a borrower to overstate income or leave a debt off the loan application. It’s very rare, but it happens. If the borrower goes along with this scheme, he or she is committing mortgage fraud.
Who Commits Mortgage Loan Fraud?
Anyone who knowingly participates in conspiring in lying on a mortgage loan application to deceive a lender in giving them a loan is part of a mortgage loan fraud scheme.
Homebuyers, sellers, real estate agents, attorneys, property investors, loan officers and mortgage brokers, home appraisers, title officers, insurance agents, underwriters and loan processors are all in a position to commit loan fraud.
Anyone who knowingly helps someone else commit mortgage fraud is also guilty of defrauding lenders.
Any kickbacks between the Realtor, mortgage lender, attorneys, or anyone associated with the origination and/or purchase of the subject property is illegal and considered mortgage loan fraud.
A mortgage lender cannot give a Realtor a referral fee. Nor can a Realtor give a lender a kickback for referring business. Same with attorneys, title companies, appraisers, and anyone involved in the mortgage and real estate purchase process.
Bottom line is that referral fees are not allowed under any circumstances. The government does not waste any time bringing federal charges to those who have kickback programs among licensed professionals.
Another kickback practice involves a seller inflating the purchase price and giving the buyers a kickback to induce them to purchase the home. Inducements to purchase — for instance, offering a credit for closing costs or throwing in the hot tub — are legal if disclosed upfront in the purchase contract. If they happen behind the scenes, however, it misleads the lender and appraiser about the property value and that’s illegal.
This practice is an absolute no-no in the mortgage business and if participants get caught, there will be severe consequences.
Fraud Using Fake (Straw) Buyers
Straw buyers are actual home mortgage loan applicants who apply for a loan as an owner-occupant. Fake homebuyers have no intention of living in the subject property.
Fraud using fake mortgage loan applicants is very common still today. Scams using straw home buyers happen when the actual owner occupant borrower does not qualify for a mortgage loan.
Straw buyers are fake buyers. Sometimes, a family member might apply for a home loan to help someone who can’t qualify for a loan. The They do not realize that they are committing mortgage loan fraud. Those who are applying for a mortgage loan as an owner-occupant residence are required to move into the subject property within 60 days of closing on the home. If buying the home as an owner-occupant, they need to be an owner-occupant for at least one year.
Ask the Experts
For more information about this article or other mortgage-related topics, please contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at [email protected]