Protecting Yourself from Mortgage Fraud
Buying a home is exciting. But the process can be complicated and confusing, and in some cases, it can result in some illegal activities. Mortgage fraud is a real issue, and home buyers and sellers need to be careful in their real estate dealings; otherwise, they could either become the victim of a fraudulent scheme or unwittingly participate in one themselves.
What Is Mortgage Fraud?
The definition of fraud is the deliberate misrepresentation of facts, figures, or things in order to deceive. In other words, you tell Party A the item is a red square; they believe you and buy it, only to discover that the square is actually pink. Or blue. Or not even a square. When it comes to mortgage fraud, imagine you had to get a loan for the red square, so you presented this information to a lender, but unbeknownst to the lender, you were really financing the purchase of a purple triangle. In other words, if the transaction isn’t for exactly what is being presented, this is a form of fraud. And in the case of mortgage fraud, it is not that hard to get taken advantage of, as either the buyer or the seller.
Why Is It a Big Deal?
For starters, any business transaction that isn’t on the up-and-up is a big, bad deal. Cheating people out of their hard-earned money and possessions is never an ethical act and is a form of theft. Another thing to consider: the housing crisis of 2007-2009 was caused largely by lenders who made loans that were based on fraudulent information provided by less-than-trustworthy mortgage brokers. But mortgage fraud is also on the rise today. More about this in a moment.
Types of Mortgage Fraud
Mortgage fraud can run the gamut from the buyer being totally involved to transactions that never actually involve a property or a buyer at all.
The buyer is fake, the property is fake. The mortgage company, real estate broker, appraiser, and others are all in on the scam. A fake borrower is created, and he has a fake job, fake income, fake tax returns, and made-up employment records and rental history. A lender approves the loan, and everyone involved splits the profits from the loan. In some cases, there’s even a lender in on the scheme, and they push the loans through faster by certifying fraudulent bank and financial statements.
Now that we’ve talked about the most ridiculous examples of these schemes, here are more common types of mortgage fraud.
Reporting more income than a borrower actually has is a form of fraud. Some borrowers are doing this because more stringent rules for borrowing are preventing them from buying homes of a size they need in their desired neighborhoods. Other borrowers might rationalize that if they can afford a $700 rent payment, then regardless of what the lenders say, they can swing that in a house payment. What they fail to take into consideration are the other expenses that go into owning a home that renters don’t have.
Lenders provide loans with better rates for borrowers buying property that they plan to occupy as their primary residence. They typically cut deals with investors. So, some unscrupulous borrowers state that they intend to live in the property, although they know full well that they have no intentions of doing so.
Buying a home, fixing it up, and selling it is legal. For example, buying a fixer-upper for $40,000, making $15,000 worth of renovations and improvements, and selling the home for $65,000 is perfectly legal—admirable, even. But buying the house for $40,000, making few or no changes to it, finding an appraiser willing to falsify an appraisal to support an inflated asking price, and then selling the house for $65,000 is fraud. This is also directly linked to property fraud because the property is being misrepresented.
If you thought identity theft was getting your bank account emptied and your credit cards maxed out, you’ve really only scratched the surface. Some people will use another person’s identity to purchase a home. Of course, the person whose identity was stolen has no idea this has happened until the missed payments start to show up on their credit report.
In the identity theft example above, the person whose identity is being used to purchase a home has no idea what’s going on and obviously has not consented to the purchase. A willing participant in a “straw buyer” scheme lets the buyer use their financial information to purchase a property, usually in exchange for money or something else of value.
Repaying a Down Payment Gift
Many people don’t realize that paying back someone who offered you a down payment for a home is a form of mortgage fraud. Here’s why it’s illegal. When you provide your financials for the loan, you have to include all your income as well as your debts. Car payments, student loan payments, credit card debt, all of it must be accounted for. So if your parents offer you the 10% down payment for the home and you promise to pay them back, technically, you’ve created another debt for yourself that you didn’t report on your financials. Not including it is fraud.
How to Avoid Mortgage Fraud
The easiest way to avoid fraud is to:
Deal with honest people. Look for lenders, brokers, and companies that have been in business for years.
Check out the companies that made it through the housing crisis without being in the headlines. In other words, they weren’t part of the problem.
If a loan or deal seems too good to be true, it probably is; have the deal looked at by a reputable real estate attorney.
Guard your financial information and check your credit report regularly.
Never, ever under any circumstances agree to let someone else use any part of your identity for a business transaction.
According to several sources, mortgage fraud is on the rise. Protect your information and make sure any deal you go into is completely on the level so you can avoid any legal problems.