Mortgage frauds can be as devastating for lenders as it is for homebuyers. What is mortgage fraud and what are the common frauds to be wary of? Let’s dig deeper.
Your neighbor, let’s call her Harper, lives a regular life. She and your kids go to the same school, and your families often get together for a backyard barbeque. However, the other house adjacent to yours doesn’t seem occupied. Which is strange because it was sold a few months ago but no one seems to have moved in. Chances are the owner is committing mortgage fraud. How is that possible? The Federal Housing Administration (FHA) loan terms stipulate that the owner must live in their new home. However, the house is up on rent—this is called occupancy mortgage fraud.
In such cases, applicants borrow mortgage loans to purchase a home and convey they would live there. The real aim is to resell the property for a better price. How does it affect you, the lender? If the original owner sells and transfers the ownership title of the property without repaying the entire loan, chances are the new buyer may not pay it off either.
What Are Some Mortgage Fraud Red Flags?
Occupancy mortgage fraud is just a drop in the sea. Here are some red flags that can help you avoid mortgage frauds.
Usually, people don’t break a sweat while forging details in loan applications—they worry about the penalty, if caught. Temptation to use property as a reselling investment is strong because it can yield a down payment of up to 15%, compared to 3% in case the owner occupies it.
As a lender, you must work with enforcement agencies to raise a red flag. Look for unusual applications: If a borrower is purchasing a home far from their workplace or if they have approached multiple lenders with a mortgage loan application.
Lodge a complaint with the Treasury Department’s Financial Crimes Enforcement Network if you suspect any unscrupulous activity—the department’s database will help you verify the truth. If fraud is detected, you may either terminate the loan application or the Treasury department can prosecute the applicant.
What Are the Types of Mortgage Frauds?
In most cases, mortgage fraud leads to high interest rates—the owner is looking to resell property instead of occupying it. If they get caught it can result in high insurance rates and an expensive qualification process. Here’s a list of some other mortgage frauds.:
Straw buyer mortgage fraud is when a person buys property on behalf of someone who funds the purchase. Here’s an example: Dimitri applied for a mortgage loan. However, his application was rejected because of insufficient bank balance—an important term in the loan document. So, he asks his friend to purchase the home and apply for a mortgage loan on his behalf. After the purchase and closing of mortgage loan, it is found that the property is used for illegal activities.
Straw buyer frauds may not seem serious on the surface. However, they can lead to criminal prosecution if the buyer is found guilty. It is used in cases where the original applicant couldn’t qualify for mortgage because of poor credit score or non-acceptance of mortgage terms.
Flipping is very similar to occupancy fraud—it involves reselling property quickly after purchase. The owner uses flipping to earn quick profits. In some cases, they may gamble on the house value and sell it off for profit. Flipping violates the minimum residency term—usually an important clause in mortgage contracts.
Let’s try to understand this one with a simple example: John applies for a mortgage loan. He fabricates a higher income proof and purchases a home that is over budget. A few months down the line, Dimitri can’t afford to pay the installments anymore.
As the name suggests, income fraud occurs when a buyer submits false income statement to get low interest rates (better repaying capacity) or high-value loans.
The list of mortgage frauds is endless, and it is important to be familiar with the more common ones, so you know how to avoid mortgage frauds.
Thanks to digitization, you can easily detect mortgage frauds before closing a loan application or title transfer. You can rely on technology-led solutions to verify all documents submitted in the application process.
HelioNext is your end-to-end mortgage loan handling partner. Our automated mortgage solutions flag risks by verifying data across multiple check points. Don’t let the fear of mortgage fraud hold you back from delivering the best services to your clients. Get in touch with our representative today.