If you look at some of the most common financial crimes, you will realize that mortgages provide people with the opportunity to defraud, mislead, and even cut corners for their gain. Do you know about some of the mortgage fraud red flags to look out for? Do you even know how to report them?
We cannot blame you if you do not know how to spot these red flags. Some of them are difficult to see. We will discuss some of the most common types of red flags to check out to avoid mortgage fraud. But before then…
Introduction to Mortgage Fraud
Let us assume that you are ready to buy a home. You check out different financial institutions and settle on one that matches your requirements. However, instead of providing the accurate information that the institution requires to fund the purchase of your house, you choose to lie to them. You will have committed mortgage fraud.
Here are five red flags of mortgage fraud.
1. Straw Buyer
Let us take the example of person A, who wants to buy a house. They calculate home affordability with SoFi and find that they cannot afford the house that they want. They might be hiding some involvements or maybe have bad credit, things that can disqualify them from a mortgage.
They, therefore, get person B to act for them. This means that person B will act as if they are the one applying for the mortgage. Person B will then transfer the house to person A after completing all transactions. Person B is known as a straw buyer.
Signs to Look For
If you are a lender, check the source of the funds. You should be careful if you realize they are coming from an institution or entity. In addition, check if the supposed buyer has indicated they do not want to occupy the house after purchase. Also, interact with the buyer personally.
2. Occupancy Fraud
Let us take the same example of person A who wants to buy a house. They approach a financial institution and do not tell the truth when it comes to the occupancy of the house. Most of the time, this person will be living somewhere else.
They will, however, lie that they will be living in the house they are buying to get favorable status from their banks. This fraud gives them high loan-to-value ratios, lower purchase costs, and low mortgage rates.
Signs to Look For
If you want to avoid this mortgage fraud, scrutinize all appraisals to see if the applicant expects rent payments. You should also be careful with buyers who provide large down payments and claim to live rent-free in their homes.
3. Property Flip
You can decide to buy a house, improve it to make it a home, or even hold and resell it at a higher price. There is nothing wrong with that. However, if you buy it at a below-market price and then resell it immediately at an inflated price, you will have committed fraud.
This is because the property is assumed to have a fraudulent appraisal whose purpose is to mislead the person you are selling it to.
Signs to Look For
As a lender, property flip is one of the mortgage frauds you should identify easily. The first sign you should look for is if you are dealing with the real buyer or a straw man as discussed above. You should also check to see if the property was in foreclosure recently or was bought at a very low price. In addition, ensure that the value of the appraisal is not inflated.
4. No-Arm’s Length Transaction
This is one of the most common mortgage frauds you should be very careful about. Now, imagine a situation where the parties involved in the mortgage transaction are related in some way. Both the borrower and lender might be manipulated in some way. Instead, go for arm’s length transactions.
Signs to Look For
You should avoid a mortgage transaction that involves parties that are related. This is the first thing you need to look out for. In addition, if the buyer does not want to deal with a real estate agent, be very careful. They might be doing this to limit the number of entities that might expose them.
5. Income Fraud
Person A wants to apply for a mortgage. They, however, lie about the continuity or availability of their income to ensure that it matches the loan requirements. They might provide income information without verification or even misrepresent their employment.
Signs to Look For
The first thing to look for is any discrepancies that might exist in the life experiences of the borrower. Also, check to see if their income and job title matches their income. Ensure that the employer listed is real and has a valid location.
How to Report Mortgage Fraud
If you suspect any of the mortgage frauds discussed above, you should report it to the relevant authorities. The first thing to do is to follow the regulations provided by your financial institution.
You can also check the reporting steps provided by GSEs (Government-Sponsored Enterprises). Make sure that you have all the information and files to support your case.
Mortgage frauds are common, and you should be careful to avoid falling victim. As you can see above, you can identify the red flags and avoid them early enough to be on the safe side.