Mortgage fraud can involve lying on a mortgage application or scamming distressed homeowners. Here's how to avoid and report it

• Mortgage fraud is when information is falsified or withheld during the application process to manipulate the loan's terms or a bank's decision to approve it.
• Both borrowers and homeowners can commit mortgage fraud — or they can be victims of it.
• Scams targeting homeowners facing foreclosure are some of the most common types of mortgage fraud.

Mortgage fraud is a serious offense, and it's one that borrowers and homeowners can both commit and be victims of.

When fraud is committed by mortgage borrowers, it's often because they wanted to buy a home but believe their finances would prevent them from getting approval. Things like lying on your mortgage application or misrepresenting your income are considered mortgage fraud and come with serious legal repercussions.

But borrowers and homeowners can also be victims of fraudsters looking to profit off of individuals going through a confusing or stressful process. Homeowners who are behind on their mortgage payments or are facing foreclosure are especially vulnerable, as some of the most common mortgage fraud schemes target distressed homeowners.

What is mortgage fraud?

Mortgage fraud involves providing false or deceptive information to a lender in order to obtain mortgage approval. The FBI defines mortgage fraud as "a lie that influences a bank's decision." Scams that target homeowners facing foreclosure also fit the FBI's definition of mortgage fraud.

How is mortgage fraud detected?

With rising mortgage rates and high home prices, buying a home has become less affordable. "Historically, fraud becomes a bigger issue for the mortgage industry during times of strong or weak mortgage application activity," says Nick Larson, senior director of strategy and business development at LexisNexis Risk Solutions. "This can tempt consumers to falsify income, liabilities, and occupancy in order to improve the chances of securing a higher-dollar mortgage."

Financial institutions monitor for signs of fraudulent activity by carefully verifying all the information they receive from applicants.

Stricter underwriting processes and advances in technology have made it more difficult for loan applicants to get away with submitting false information. For example, mortgage lenders typically verify the information you provide about your income by requesting your tax transcript directly from the IRS. Some lenders also have the ability to pull information about your assets directly from your bank with your permission.

Lenders will also look for suspicious activity related to the specific transaction. For example, if you're buying a house to be used as your primary residence that's several hours away from where you work, and you're not a remote worker, that can be a red flag. Or if a home appraises for a significantly larger amount than what other similar homes in the area are valued at, that would call for further investigation.

But fraud can still be difficult for lenders and law enforcement agencies to detect. Part of the reason for this is it's relatively rare — in the second quarter of 2020, only 0.61% of mortgage applications contained fraud, according to CoreLogic. 

Most of these instances involved borrowers misrepresenting their finances on their application so they could purchase a home. Larger schemes are more rare, but they can cost financial institutions more money. 

Types of mortgage fraud

Mortgage fraud falls into two categories: fraud for profit and fraud for housing.

Fraud for profit

This type of mortgage fraud is often committed by people who work in the mortgage industry, such as loan officers, appraisers, or real estate attorneys. The aim of scams that fall under this umbrella is to make money.

The FBI prioritizes investigating cases involving fraud for profit. 

Fraud for housing

This type of mortgage fraud is typically committed by borrowers. Fraud for housing, as the name suggests, involves providing false information to mortgage lenders in order to buy a house. An example of fraud for housing is inflating your income on your mortgage application with the goal of being able to buy a home for a larger amount than you'd typically qualify for.

Examples of mortgage fraud

Mortgage fraud typically falls into one of the two categories of fraud listed above, but there are countless different ways that fraud can be committed. Here are some of the most common schemes that consumers should be on the lookout for.

Foreclosure scams

The foreclosure process can be stressful, confusing, and scary, which makes those going through it a prime target for bad actors. Fraudsters may offer to assist the homeowner through the process, charging large fees to negotiate loan modifications with the homeowner's lender or servicer. Or, they might offer a path out of foreclosure by having the homeowner "temporarily" transfer the deed to the property to them. Then, they may sell the property or have the homeowner pay them rent while letting the property go into foreclosure.

Equity skimming

In this scheme, an investor has a "straw buyer," which is a loan applicant working on behalf of someone else, to get a mortgage to purchase a property. Once the property is purchased, the straw buyer uses a quit claim deed to give ownership to the investor. The investor then rents out the property for profit while failing to make payments on the mortgage. Eventually, the property is foreclosed on.

Property flipping

Property flipping, as most people understand it, isn't illegal. But illegal property flipping happens when an individual purchases a home, an appraiser artificially inflates the value of that home, and then it's immediately resold for a profit. 

Occupancy fraud

Borrowers typically get lower interest rates and can make lower down payments on properties they intend to live in as their primary residences. If an individual intends to use a home as a second home or investment property but tells their lender they'll be using it as their first home, they've committed occupancy fraud.

Appraisal fraud

Appraisal fraud occurs when an appraiser doesn't value a property according to its actual market value. Because lenders won't lend more than what an appraisal says a home is worth, appraisals may be artificially inflated so that the market value matches the list price. Unscrupulous appraisers can also artificially lower the market value of a home so that the purchaser can buy the home at a lower price and then turn around and sell it for a profit.

How to report mortgage fraud

There are a few different entities you can report suspected mortgage fraud to, according to the Department of Justice.

To make a report with the FBI, contact your nearest field office or call 1-800-225-5324. You can also make a report online.

The Department of Housing and Urban Development accepts tips via its hotline. Call 1-800-347-3735.

If you believe you're being targeted by a foreclosure-related scam, you can reach out to the Homeownership Preservation Foundation's HOPE Hotline at 1-888-995-HOPE (4673).

The Federal Trade Commission also has a website where you can report fraud.

How to protect yourself from mortgage fraud

Homeowners who are behind on their payments and are at risk of foreclosure need to be especially vigilant, as they're more likely to be targets of mortgage fraud.

"Don't engage unsolicited businesses, meaning anybody that you haven't reached out to first," Angel Hernandez, vice president of Industry and Regulatory Affairs at Stavvy, says.

If a company advertises help with loan modifications or loss mitigation, check with your lender or servicer first to find out if that company is reputable.

You can ensure you're working with reputable companies by using a HUD-approved housing counselor. These counselors offer free or low-cost advice. If you're approached by a company that charges large fees to help you, they likely aren't reputable.

To find a HUD-approved housing counselor, you can search online or call 1-800-569-4287.

You can also avoid scams by working proactively with your mortgage lender or servicer. Homeowners can often be afraid of talking to their lender when they're behind on payments, but the lender is often best situated to help you avoid a loss.

Hernandez also says that although borrowers are often hesitant to reach out to them, lenders and servicers want to help their borrowers resolve delinquencies. "A success for the servicer is directly tied to the success of the homeowners that they are serving," Hernandez says.