What is Mortgage Fraud?

Instead of lying on an application, criminals impersonate a homeowner or borrower. Using stolen personal information, they may take out a mortgage or home equity loan in someone else’s name – or even transfer the property’s title without the owner’s knowledge.

There are many different types of mortgage fraud and mortgage identity theft – which we’ll discuss in more detail below. These schemes can take advantage of buyers, existing homeowners or lenders, according to the Federal Housing Finance Agency (FHFA). These mortgage fraud schemes tend to fall into one of two large categories: fraud for profit and fraud for property, according to the Financial Crimes Enforcement Network (FinCEN).

Fraud-for-profit schemes are typically perpetrated by or with the help of insiders — such as real estate brokers or appraisers, according to the FHFA. The parties involved deploy tactics to inflate home equity or pocket cash by exploiting elements of the mortgage loan process. Here are several different types of mortgage frauds and two types of mortgage identity theft.

Home title fraud

Home title fraud is a combination of mortgage fraud and identity theft, according to the Better Business Bureau (BBB). Con artists find a home to steal, then impersonate the homeowner, using their name and personal information found online. They may create various fake IDs and purchase forms to transfer the title. The FBI explains that this can be done with homes that are lived in or vacant homes.

Foreclosure rescue

Scammers in this scheme target people facing foreclosure, explains Freddie Mac. Also known as “debt relief scams”, the scammer tells the homeowner that they can help pay off their mortgage and that they won’t lose the house.

In some instances, scammers may get help from someone with industry knowledge to make the scheme even more convincing. Additionally, homeowners may be advised not to speak with lawyers or other mortgage lenders, says the National Foundation for Credit Counseling (NFCC).

Collect and vanish

According to the NFCC, “collect and vanish” begins when the homeowner pays an upfront fee to a scammer who claims they can quickly find a buyer. Or for a fee, the scammer says they’ll work out a favorable deal with the mortgage lender. They may even talk the homeowner into making mortgage payments to them directly, according to the Journal of Forensic & Investigative Accounting (JFIA). After a few months, the scammer will stop returning the homeowner’s calls and ultimately disappear with the money they collected.

Home equity conversion mortgage (HECM)

An HECM, explains the U.S. Department of Housing and Urban Development (HUD), is a way to use your home’s equity as a line of credit, for fixed monthly withdrawals or both. It could even help pay for a primary home. Homeowners have to be at least 62 years old to be eligible for HECMs.

JFIA says that HCEM scammers buy foreclosed or abandoned homes through “straw buyers.” A straw buyer is typically someone with good credit whose name is used on the loan but who doesn’t live in the home, says the Department of Insurance, Securities and Banking (DISB). Sometimes the straw buyer is bribed, or their name is used without their knowledge.

The scammer then offers the home for free to an unsuspecting senior citizen, according to the FBI. They may be targeted through TV or radio ads, billboards or even churches. Once they’ve lived in the home for 60 days, the scammer will help them get an HECM with a fraudulently high appraisal, says JFIA.

Equity skimming

Equity skimming is when con artists target homeowners having financial problems, according to the FTC. They may promise to find someone who’ll buy the home and convince the homeowner to sign over the deed. Once this happens, scammers will rent out the home for a profit and allow the home to be foreclosed on. Unfortunately, adds the FTC, transferring the deed doesn’t mean the homeowner is no longer off the hook for the unpaid mortgage.

Builder bailout

Builder bailout schemes often happen in a tough housing market, according to Freddie Mac. Builders take out loans to fund housing projects. They try to sell enough homes to pay back the loan and make a profit. If they don’t sell enough homes and can’t pay back the loans, they may resort to fraudulent activity. Bailout schemes come in many forms, says Freddie Mac. Many involve convincing homebuyers or investors to purchase the property through false promises. For instance, they may advertise closing cost assistance or no money down promotions. They may tell investors that they’ll offer property management services, but then renege on the agreement.

Illegal property flipping

According to the FBI, this type of fraud occurs when a purchased property is appraised at an inflated value and immediately sold. An appraiser is often involved in the scam, and the home is valued for improvements that never took place.

JFIA notes that illegal flipping schemes can involve straw buyers, industry insiders and identity theft. Usually, no real estate agents are involved in the process.

While this categorization or definition could vary slightly depending on where you look, mortgage fraud for property is generally a scheme designed to take advantage of lenders. An individual or individuals materially misrepresent or omit information to trick a lender into extending credit they normally wouldn’t if they had access to all relevant facts, according to FinCEN.

Identity theft

According to the Federal Trade Commission (FTC), identity theft is when someone uses the personal information of someone else without them knowing – anything from Social Security numbers to credit card numbers. Scammers can use this information to obtain mortgage loans or impersonate home sellers.

Rent-to-buy

In this scheme the homeowner transfers ownership of the house to the scammer, explains American Consumer Credit Counseling. In return, the scammer says they’ll cover the outstanding mortgage payments. The homeowner then pays the scammer back in “rent,” believing they’ll eventually buy back the house. According to the FBI, the scammer instead collects the money, evicts the homeowner and sells the house for an additional profit.

Income fraud

This is one of the most common mortgage fraud schemes, says the American Land Title Association (ALTA). Income fraud is simply when a buyer lies about their level of income and debt to obtain a mortgage loan. They may inflate their salary, make up an employer or fabricate pay stubs.

Occupancy fraud

Occupancy fraud is when an investor takes out a loan on a home but says it’ll be used as a primary residence, according to the ALTA. This gets them a lower interest rate and down payment than if they had applied as an investor.

On the flip side, says ALTA, occupancy fraud can happen if the buyer says they plan to rent out the property. The potential rental income helps the homebuyer qualify for the loan. Instead of renting it, however, they use it as a primary home.

There are many different types of mortgage fraud and mortgage identity theft – which we’ll discuss in more detail below. These schemes can take advantage of buyers, existing homeowners or lenders, according to the Federal Housing Finance Agency (FHFA). These mortgage fraud schemes tend to fall into one of two large categories: fraud for profit and fraud for property, according to the Financial Crimes Enforcement Network (FinCEN).

While this categorization or definition could vary slightly depending on where you look, mortgage fraud for property is generally a scheme designed to take advantage of lenders. An individual or individuals materially misrepresent or omit information to trick a lender into extending credit they normally wouldn’t if they had access to all relevant facts, according to FinCEN.

Identity theft

According to the Federal Trade Commission (FTC), identity theft is when someone uses the personal information of someone else without them knowing – anything from Social Security numbers to credit card numbers. Scammers can use this information to obtain mortgage loans or impersonate home sellers.

Rent-to-buy

In this scheme the homeowner transfers ownership of the house to the scammer, explains American Consumer Credit Counseling. In return, the scammer says they’ll cover the outstanding mortgage payments. The homeowner then pays the scammer back in “rent,” believing they’ll eventually buy back the house. According to the FBI, the scammer instead collects the money, evicts the homeowner and sells the house for an additional profit.

Income fraud

This is one of the most common mortgage fraud schemes, says the American Land Title Association (ALTA). Income fraud is simply when a buyer lies about their level of income and debt to obtain a mortgage loan. They may inflate their salary, make up an employer or fabricate pay stubs.

Occupancy fraud

Occupancy fraud is when an investor takes out a loan on a home but says it’ll be used as a primary residence, according to the ALTA. This gets them a lower interest rate and down payment than if they had applied as an investor.

On the flip side, says ALTA, occupancy fraud can happen if the buyer says they plan to rent out the property. The potential rental income helps the homebuyer qualify for the loan. Instead of renting it, however, they use it as a primary home.

Knowing the warning signs of mortgage fraud can help keep you better protected. Here are some tips to help you avoid mortgage fraud schemes.

Avoid parties that tell you not to contact your lender

This is common in loan modification scams, according to the FTC. Scammers don’t want you reaching out to your lender or lawyer and may also ask for a large upfront fee. This allows them to carry on illegal activity without a legitimate resource, like your mortgage lender, from intervening.

Stand up to high-pressure tactics

Being rushed to sign documents is a common red flag, says Freddie Mac. This is especially true if you haven’t had a chance to read through them or have outstanding questions.

Watch out for home prices that don’t match the value

A common sign of illegal property flipping is when the sales price is noticeably higher than the list price, says Freddie Mac. Contact the listing agent to check the property’s listing history. You might also give the appraisal itself a closer look.

Be honest on your mortgage application

Freddie Mac warns buyers to beware of anyone trying to falsify their information to get a loan. That might include inflating income, credit or assets. Don’t sign anything until all blank spaces are filled with info you know to be true. And don’t sign anything you don’t fully understand, adds the FBI.

Be suspicious of “no down payment” offers

The FBI warns buyers about those claiming you can buy a home with no down payment. A similar red flag is if the seller is willing to help with the down payment or closing costs. Again, reverse mortgage scams use these tactics and are known to target senior citizens.

Never transfer title of ownership

The FTC warns homeowners to avoid any business that asks you to transfer property to them. Otherwise, your name will be removed from the deed. Scammers in this situation can seize your property, strip it of equity, evict you, or all of the above.

Know how a legitimate company operates

According to the NFCC, a trustworthy company will be thorough about collecting information and explaining the offer. They’ll answer all your questions and give you all the information you need to be confident in your decision. Everything will be in writing. They won’t try to talk you out of consulting a lawyer or other expert.

The NFCC adds that legitimate companies won’t make bold promises to fix your credit or save your home. Always reach out to your lender or lawyer before signing anything.

If you suspect identity theft, whether it’s against you or someone else, report it to IdentityTheft.gov. They’ll help you set up a report and create a recovery plan. You can also get a free copy of your credit report to check for any suspicious activity on your accounts.

If you have an identity theft protection plan with a provider, like a home or auto insurance company, reach out to them, too.

There are many types of plans that help restore your identity. Identity theft insurance can help reimburse you for stolen expenses. But identity theft protection plans take measures to protect your identity from being stolen in the first place. They can help monitor your finances and alert you about suspicious activity in any of your accounts. Some even keep tabs on the dark web to ensure your personal information isn’t being used.

Additionally, an identity theft protection plan can help restore your finances if you fall victim to identity theft. It may help cover not only the funds you lost from the theft but also fees related to repairing your credit and identity, as well as legal fees and lost wages if you have to take time off work.

If you’re considering an identity theft protection plan, check with your employer – many offer them as an employee benefit. You can also ask your auto or homeowners insurance provider, as some carriers include these plans or offer them at a discount. If a plan is available, the FTC recommends asking your provider what it covers and the types of monitoring services it provides, if any. Even if a plan is not available through your current insurer, you should be able to sign up directly through a company that specializes in identity theft protection.

Remember, an identity theft protection plan won’t prevent mortgage fraud or identity theft. But taking precautions and having a safety net there just in case can make it that much easier to pick up where you left off in the event you do experience identity theft.