6. Mortgage Fraud Red Flags

Mortgage fraud doesn't have to ruin a borrower's personal or financial life. It can be prevented by paying attention to warning signs and red flags that are often noticeable in advance.

By paying close attention to these warning signs, borrowers can avoid a painful, costly, time-consuming and potentially criminal situation. It is important to note that there are more types of fraud than is described in this section but this represents several of the major ones

Quit-claim deeds
Quit-claim deeds can be used to transfer ownership of a property from one person to another. They are often used in "straw borrower" transactions where a person with good credit is used as a fake purchaser to cover for an actual purchaser who is unable to obtain a mortgage due to bad credit. The straw borrower may become involved as a favor for a friend or be paid for their role by professional scammers. A quit claim deed used either right before after the loan closing, someone signing on the borrower's behalf, the lack of sales agent involvement or an indication of default by the property owner are all signs that mortgage loan fraud may be involved.

Builder bailout
Builder bailouts occur when the builder or developer is motivated to move property quickly in a depressed real estate market. Some of the following red flags in this situation include a borrower who normally would be unqualified suddenly becoming qualified, inflated sales and appraisal prices, and the involvement of "silent" second mortgages.

Flips
Flips are another common type of mortgage fraud. They occur when ownership of one property changes several times in a brief period.  Flips are often used to artificially inflate the value of the property to obtain larger loans than what might otherwise be possible and to skim the equity off of the property. 

Warning signs of possible flips include frequent ownership changes within a brief period of time, not having the property seller on the title, references to a double escrow or other HUD-1 form, and tremendous fluctuations of the sales price over a period of a few weeks or months.

False and misleading information
There are also many instances where a mortgage loan document may contain false or misleading information. There are numerous times where certain warning signs will require a closer examination of an application, or of the applicants themselves. A non-purchasing spouse is one example, and down payments other than cash (such as rent credit and sale of personal property) is another.

Any inconsistent reports of income or non-transient jobs are also red flags.

An applicant's personal information may also yield some warning signs. These may appear in the credit report, verifications of employment, deposit verifications and tax return information. Personal data should always be accurate and credit habits should be relatively consistent with income and employment trends.

The key is to pay close attention to the information provided by any and all parties. If anything looks questionable, further research by the borrower is needed.