Mortgage fraud is a type of fraud in which the details of a mortgage application are manipulated for the purpose of benefiting the buyer, the seller, or a third party, typically at a cost to the lending institution. It is punished very severely in some regions of the world, although lack of investigative ability on the part of government agencies has made mortgage fraud appealingly low-risk in the eyes of criminals. Mortgage fraud is not the same thing as predatory lending, a practice in which a lender deliberately misleads or confuses borrowers.
There are two types of mortgage fraud: fraud for property, and fraud for profit. In fraud for property, the buyer is usually responsible for the mortgage fraud, making omissions in the mortgage application which ensure that the application will be approved. For example, someone might lie about his or her income, financial obligations, employment status, or position at a company in order to secure a loan. In these cases, people commit mortgage fraud because they will not be able to afford property otherwise.
In fraud for profit, the goal is to defraud the lending institution of money and escape with the profits. There are a number of ways in which people can commit mortgage fraud for profit, with a classic scheme being appraisal fraud combined with illegal property flipping, in which a home is bought at a low cost, appraised at an artificially high price, and 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 lending institution is defrauded of the amount of the loan.
Some other mortgage fraud tactics include shotgunning, in which multiple mortgages are secretly taken out on the same home, and identity theft, in which a buyer assumes the identity of someone else to commit fraud. In cash-back schemes, buyers may become unwittingly involved in mortgage fraud when they agree to conceal the disclosure of cash-back payments, while in occupancy fraud, a buyer lies and says that he or she intends to live in a property, obtaining a special mortgage rate, and then rents it out.
Home buyers should be aware that it is easy to get involved in mortgage fraud by accident. For example, if you buy a home with a roof in poor condition and the seller volunteers to pay for the roof without disclosing the payment on the contract for the home, this is mortgage fraud. If you do reach an agreement in which the seller pays to repair or replace something as a term of sale, this should be spelled out in the contract, along with any other exchanges of cash or services. Working with a reputable real estate agent and bank and disclosing all of the details of a sale is the best way to avoid mortgage fraud. If you aren't sure about whether or not an activity would be considered fraudulent, you should talk to your mortgage loan officer.
