What is Mortgage Fraud
This guide covers what mortgage fraud is. What is mortgage fraud during the homebuying and mortgage process? 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).
A real estate agent might secretly loan the buyer money for a down payment. This is called a “silent second” mortgage. This loan constitutes mortgage fraud because buyers cannot borrow down payments.
Last week, an Associate Cook County Circuit Court judge was charged with mortgage fraud for lying on a mortgage application over ten years ago. Homebuyers can commit loan fraud by mistake if they are not careful. In the following paragraphs, we will discuss mortgage fraud and how to avoid fraud during the homebuying and mortgage process.
Prequalify to buy a home in just five minutes.
What Is Mortgage 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.” Lying about the source of your down payment is mortgage fraud.
Purchasing a rental property and stating that you plan to live in it is fraud. Another form of fraud is not disclosing all of your debts.
Tactics 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 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.
Types of Mortgage Fraud
To avoid mortgage fraud during the homebuying and mortgage process, you must avoid certain actions. 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 constitutes fraud.
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 is another type of fraud.
Misrepresenting property details or omitting information to inflate the property value is fraud. Adding co-borrowers who will not be living in the home and do not intend to take responsibility for the mortgage Mortgage fraud is a serious offense with serious consequences.
Income 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 based on your income.
Mortgage Fraud For Profit
If someone sues you, you must disclose that on your mortgage application. Otherwise, you’re committing 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 to get their commission or loan fees. In that case, the pro is committing fraud for profit, while the buyer is committing fraud for housing.
Who Commits Mortgage Loan Fraud?
Anyone who knowingly conspires to lie on a mortgage loan application to deceive a lender into giving them a loan is part of a mortgage loan fraud scheme. 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.
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. 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.
Fraud of Illegal Kickbacks
Any kickbacks between the Realtor, mortgage lender, attorneys, or anyone associated with the origination or purchase of the subject property is illegal and considered mortgage loan fraud. A mortgage lender cannot give a realtor a referral fee.
The bottom line is that referral fees are not allowed under any circumstances. The government does not waste any time bringing federal charges on kickbacks 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 credit for closing costs or throwing in the hot tub — are legal if disclosed in the purchase contract.
Are Referral Fees Illegal?
Mortgage loan officers are not allowed to give or receive referral fees. Real estate agents cannot give a lender a kickback for referring business. Loan officers cannot give or receive referral fees from attorneys, title companies, appraisers, and anyone involved in the mortgage and real estate purchase process.
Real estate agents are allowed to offer and receive referral fees on real estate transactions. However, loan officers are not allowed to give or receive referral fees.
If giving or receiving referral fees happen behind the scenes, it constitutes mortgage fraud. Loan officers cannot do anything to influence the home appraiser to get a higher property value which is illegal. This practice is an absolute no-no in the mortgage business, and if participants get caught, there will be severe consequences.
Fraud Using 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 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. They do not realize that they are committing mortgage loan fraud.
Those 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 must be an owner-occupant for at least one year. For more information about this article or other mortgage-related topics, don’t hesitate to get in touch with us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com.
