Mortgage fraud involves manipulating mortgage applications to benefit the buyer, seller or third party, and is punished severely in some regions. There are two types: property fraud and profit fraud, with various tactics including shotgunning and identity theft. Home buyers should work with reputable agents and banks to avoid fraud.
Mortgage fraud is a type of fraud in which the details of a mortgage application are manipulated to benefit the buyer, seller or a third party, usually at a cost to the lender. It is punished very severely in some regions of the world, although the lack of investigative capacity on the part of government agencies has made mortgage fraud low risk in the eyes of criminals. Mortgage fraud is not the same as predatory lending, a practice in which a lender deliberately deceives or confuses borrowers.
There are two types of mortgage fraud: property fraud and profit fraud. In the case of property fraud, the buyer is generally responsible for the mortgage fraud, making omissions on the mortgage application that ensure that the application is approved. For example, someone may lie about their income, financial obligations, employment status, or position in a company to obtain a loan. In these cases, people commit mortgage fraud because they won’t be able to afford the property otherwise.
In for-profit fraud, the goal is to defraud the money lending institution and get away with the proceeds. There are a number of ways that people can commit mortgage fraud for profit, with a classic scheme being appraisal fraud combined with illegal property investment, in which a home is purchased at low cost, appraised at a artificially high and is sold to a buyer who may or may not exist as part of the scheme. The buyer then defaults on the mortgage, leaving the seller with cash in hand while the lender is defrauded of the loan amount.
Some other mortgage fraud tactics include shotgunning, in which multiple mortgages are secretly taken on the same home, and identity theft, in which a buyer assumes another person’s identity to commit fraud. In cash back schemes, buyers can unwittingly engage in mortgage fraud when they agree to hide disclosure of cash back payments, while in occupancy fraud, a buyer lies and says they intend to live in a property, obtaining a special mortgage rate, and then renting it out.
Home buyers should know that it is easy to get involved in mortgage fraud by accident. For example, if you buy a house with a bad roof and the seller volunteers to pay for the roof without disclosing the contract payment for the house, this is mortgage fraud. If you make an agreement that the seller pays to repair or replace something as a term of sale, this must be specified in the contract, along with any other exchange of cash or services. Working with a reputable real estate agent and bank and disclosing all the details of a sale is the best way to avoid mortgage fraud. If you are not sure whether or not an activity would be considered fraudulent, you should talk to your mortgage loan officer.
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