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- Scams targeting homeowners facing foreclosure are some of the most common types of mortgage fraud.
- Both borrowers and homeowners can commit mortgage fraud — or they can be victims of it.
- Lying on your mortgage application can also be a form of mortgage fraud.
Mortgage fraud is a serious offense, and it's one that borrowers and homeowners can both commit and be victims of.
When fraud is committed by mortgage borrowers, it's often because they wanted to buy a home but believed their finances would prevent them from qualifying for a mortgage.
Things like lying on your mortgage application or misrepresenting your income to your mortgage lender are considered mortgage fraud and come with serious legal repercussions.
But borrowers and homeowners can also be victims of fraudsters looking to profit off of individuals going through a confusing or stressful process. Homeowners who are behind on their mortgage payments or are facing foreclosure are especially vulnerable, as some of the most common mortgage fraud schemes target distressed homeowners.
What is mortgage fraud?
Mortgage fraud involves providing false or deceptive information to a lender in order to get a mortgage. The FBI defines mortgage fraud as "a lie that influences a bank's decision." Scams that target homeowners facing foreclosure also fit the FBI's definition of mortgage fraud.
Types of mortgage fraud
Mortgage fraud falls into two categories: fraud for profit and fraud for housing. Fraud for profit is often committed by people who work in the mortgage industry, such as loan officers, appraisers, or real estate attorneys. The aim of scams that fall under this umbrella is to make money. The FBI prioritizes investigating cases involving fraud for profit.
Fraud for housing is typically committed by borrowers. Fraud for housing, as the name suggests, involves providing false information to mortgage lenders in order to buy a house.
Here are some examples of common mortgage fraud schemes:
Income fraud
Income fraud involves inflating your income on your mortgage application with the goal of being able to buy a home for a larger amount than you'd typically qualify for. This is a type of fraud for housing.
Occupancy fraud
Borrowers typically get lower interest rates and can make lower down payments on properties they intend to live in as their primary residences.
If an individual intends to use a home as a second home or investment property but tells their lender they'll be using it as their first home, they've committed occupancy fraud.
Appraisal fraud
Appraisal fraud occurs when an appraiser doesn't value a property according to its actual market value. Because lenders won't lend more than what an appraisal says a home is worth, appraisals may be artificially inflated so that the market value matches the home price. Unscrupulous appraisers can also artificially lower the market value of a home so that the purchaser can buy the home at a lower price and then turn around and sell it for a profit.
Straw buyer schemes
This type of fraud occurs when someone buys a property for someone who would be unable to qualify for it themselves. The buyer does not intend to use or live in the home, but pass it off to the other party after closing.
Warning signs of mortgage fraud
With rising mortgage rates and high home prices, buying a home has become less affordable. "Historically, fraud becomes a bigger issue for the mortgage industry during times of strong or weak mortgage application activity," says Nick Larson, senior director of strategy and business development at LexisNexis Risk Solutions. "This can tempt consumers to falsify income, liabilities, and occupancy in order to improve the chances of securing a higher-dollar mortgage."
Financial institutions monitor for signs of fraudulent activity by carefully verifying all the information they receive from applicants.
Suspicious documentation
Financial documents can easily be forged or falsified, so lenders have processes in place for verifying the information on these is correct. For example, a lender will verify the information you provide about your income by requesting your tax transcript directly from the IRS. Some lenders also have the ability to pull information about your assets directly from your bank with your permission.
Unusually high appraisals or far away properties
Lenders will also look for suspicious activity related to the specific transaction. For example, if you're buying a house to be used as your primary residence that's several hours away from where you work, and you're not a remote worker, that can be a red flag. Or if a home appraises for a significantly larger amount than what other similar homes in the area are valued at, that would call for further investigation, too.
Pressure to commit fraud
Players in a transaction may feel pressured to get a deal done or a loan closed, which can also lead to mortgage fraud in some cases.
How to protect yourself from mortgage fraud
Fortunately, there are steps you can take to protect yourself against potential mortgage fraud. You can:
Verify information
Don't guess on your mortgage application. Verify every piece of information you enter, and make sure you have official documentation to back it up.
If you're unsure of what an application is asking for or what documentation is needed, ask your loan officer. It's better to ask questions than to provide something incorrect and face future fraud charges.
Work with reputable professionals
Homeowners who are behind on their payments and at risk of foreclosure need to be especially vigilant, as they're more likely to be targets of mortgage fraud.
"Don't engage unsolicited businesses, meaning anybody that you haven't reached out to first," Angel Hernandez, vice president of Industry and Regulatory Affairs at Stavvy, says.
If a company advertises help with loan modifications or loss mitigation, check with your lender or servicer first to find out if that company is reputable.
You can ensure you're working with reputable companies by using a HUD-approved housing counselor. These counselors offer free or low-cost advice. If you're approached by a company that charges large fees to help you, they likely aren't reputable.
To find a HUD-approved housing counselor, you can search online or call 1-800-569-4287.
You can also avoid scams by working proactively with your mortgage lender or servicer. Homeowners can often be afraid of talking to their lender when they're behind on mortgage payments, but the lender is often best situated to help you avoid a loss.
Hernandez also says that although borrowers are often hesitant to reach out to them, lenders and servicers want to help their borrowers resolve delinquencies. "A success for the servicer is directly tied to the success of the homeowners that they are serving," Hernandez says.
Report suspicious activity
There are a few different entities you can reach out to for reporting mortgage fraud, according to the Department of Justice.
To make a report with the FBI, contact your nearest field office or call 1-800-225-5324. You can also make a report online.
The Department of Housing and Urban Development accepts tips via its hotline. Call 1-800-347-3735.
If you believe you're being targeted by a foreclosure-related scam, you can reach out to the Homeownership Preservation Foundation's HOPE Hotline at 1-888-995-HOPE (4673).
The Federal Trade Commission also has a website where you can report fraud.
Legal consequences of mortgage fraud
Mortgage fraud can have serious consequences, both legally and financially. Mortgage fraud penalties include:
Criminal penalties
Depending on the amount of money involved, mortgage fraud can constitute a felony. If you're convicted of mortgage fraud, you could face prison time. According to the United States Sentencing Commission, the average sentence for mortgage fraud in 2021 was 14 months. Nearly three-quarters of those convicted were sentenced to prison.
Civil penalties
You also may owe fines for mortgage fraud. These can include both federal and state fines, ranging from a few thousand dollars to up to $1 million.
Impact on credit and finances
Finally, mortgage fraud can limit your financial options moving forward. Lenders will be unlikely to extend a mortgage or other loan once you've been charged with mortgage fraud.
Mortgage fraud FAQs
Mortgage fraud involves intentionally falsifying information on a mortgage application to obtain a loan.
Common types of mortgage fraud include income fraud, occupancy fraud, appraisal fraud, and straw buyer schemes.
Look for warning signs such as suspicious documentation, unusually high appraisals, and pressure to commit fraud.
Report any suspicious activity to the appropriate authorities and work with reputable professionals to verify information.
Consequences can include criminal and civil penalties, as well as negative impacts on your credit and finances.
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