Understanding Mortgage Fraud

Magicians earn applause by performing card tricks or pulling rabbits out of their hats. Anyone who tries to pull a fast one with a mortgage, however, earns prison time. Here are some examples of mortgage fraud that occur every day.

Mortgages are the largest investment most people will ever make. With all those dollar signs comes plenty of temptation for the criminal element. There are countless mortgage frauds on the market. Here are some common types perpetrated both on and by homeowners:

1. Not-so-accurate income. Because of the way self-employed people file taxes, many individuals fail to report their full income on their taxes. A "stated income" loan allows a potential borrower to claim a certain amount, and an underwriter bases a lending decision on that stated income. If a borrower inflates that figure, it constitutes mortgage fraud.
2. Under-the-table exchange. Banks are reluctant to lend money to people who can't prove that they have the financial means to make regular loan payments. A hefty down payment, however, can sway many a lender's opinion. If a seller really needs to dump a property, he can give the borrower enough money for a down payment under the table. With the money in hand, the buyer can illegally "qualify" for the loan.
3. Owner-occupant refusing to occupy. Because lenders tend to charge higher interest rates to non-owner occupants, a common mortgage fraud tactic is to claim occupancy even if you don't live on the premises. If you plan to buy property and claim occupancy, pack your bags and move in. Otherwise, you'll be committing mortgage fraud.
4. Gifting a down payment, and then repaying it. You're allowed to gift part of a down payment for a home on the condition that the gift is not repaid. It's much like the under-the-table exchange between a seller and a potential buyer, but in reverse. This "gift" is given officially, but then repaid under-the-table.

Scams from the pros

On occasion, you may fall victim to a scam perpetrated by a mortgage professional. These tend to be more complicated and are difficult to detect. It's much easier for an individual to select a trustworthy broker up front than to catch a mortgage con artist in the act.

When choosing a mortgage broker or loan officer, make sure that they're backed by a long-standing lending institution and can provide you with solid referrals. Keep your eyes open for deals that sound too good to be true, because they usually are.

You may also decide to pay for the services of an attorney to review all your loan documents prior to closing. A lawyer can provide definitive answers, and will always work on your behalf.

Mortgage fraud is a tricky topic, especially because mortgage loans tend to be confusing. As the housing market gets tighter, and buyers and sellers become more desperate, you can expect mortgage fraud to rise. Armed with the right information, you'll have the knowledge to keep them at bay.