When it comes time to get your mortgage, no doubt, you want to know the safest and fastest way to complete the process. That’s why today, we’re going to look at a few common types of mortgage frauds that you’ll want to avoid. We’ll also take a look at mortgage scams and how to avoid them before you get involved in one. To start, let’s take a quick look at the definition of mortgage fraud.
Investopedia puts it this way: “The intention of mortgage fraud is typically to receive a larger loan amount than would have been permitted if the application had been made honestly.” What could that look like? Well, there’s actually a number of ways it could go. People can get creative about receiving money dishonestly.
The two-way street of mortgage fraud
Obviously, just because you’re reading this article doesn’t mean you’re an honest person trying to avoid a scam. Generally, we can’t stop other people from being dishonest. Mortgage companies, realtors, inspectors, buyers, and endless other people get wrapped up in the dishonesty of the business world.
Mortgage fraud is a two-way street. Going down the street one way are all the mortgage companies and people that help you to get a mortgage and/or buy a house. Going in the opposite direction is you. You’re the mortgagor and prospective house buyer. Regardless of which side of the street they’re on, any of these people could be just as dishonest as the next guy and easily be part of a fraudulent scheme.
Furthermore, since we can’t control what other people are going to do, it’s up to you to do the nitty-gritty work of finding an honest mortgage company. More important though, is your honesty. For one thing, signing a document for someone else or lying about information could land you in huge trouble. Let’s hope we all agree that it’s totally not worth it in the end. And that’s not even mentioning the moral issues associated with fraud.
3 types of mortgage frauds
Sadly, there is not always a way to simply detect mortgage fraud. Because if someone’s really going to try to pull the wool over your eyes, they’ve probably done it many times before. Which might mean they’re quite skilled at what they do. While there is a fair amount of mortgage fraud that goes on with the buyer’s consent, there is also a lot of fraud that happens without the buyer’s participation. Let’s take a look at a few common types of fraud.
1 – Property flipping paired with a straw purchase
Wait, you’re thinking, what’s wrong with flipping property? True, some of our favorite TV shows are the ones where people flip houses to resell. And we’re not attacking your favorite TV shows. We’re shining the light on property flipping when it’s happening together with something called straw purchasing.
Generally, property flipping only becomes illegal when a house is bought, and then quickly resold at an artificially inflated price. For the most part, this flip includes a fraudulent appraisal, which makes the buyers assume that the house has been renovated when in reality, nothing has happened to the house.
Many times, a mortgage fraud scheme called “straw borrowers” is used in property flipping. These schemes include real people with real information, but these people are not the borrowers. Let’s look at a scenario so we have an idea of exactly what could going on:
The story of Jon Dough
Jon Dough is a 28-year-old who used to work in the tech industry. But right now he has no job. And as we all know, having no job means a dearth of money. Thus, he thinks he needs a quick way to make some money. So he comes up with what he thinks is a good plan (hint: it’s actually not—don’t try this at home).
He decides to buy a house, and pretend to do renovations. Then, he’ll quickly sell it at a higher price. Unfortunately for Jon, his credit is too bad, and he can’t get a mortgage for said house. But Jon is persistent. He doesn’t give up easily, and he thinks he’s found a workaround.
Subsequently, he enlists his second cousin, Jane (who has good credit) to apply for a mortgage for him. And instead of Jane using the mortgage for a house of her own, Jon will use it to buy his house. So, there are two problems here. First, there’s the “fake” flipping—pretending he’s doing something he’s not doing to the house. Second, there’s getting his cousin to acquire something for him that he can’t honestly acquire himself.
Of course, that was an imaginary scenario. But it’s when imaginary scenarios actually play out in real life that we should be concerned. Furthermore, we can only hope that if a similar situation does happen, John Dough would bear the consequences for gaming the system.
2 – Occupancy fraud
Here’s another way mortgages could be involved in a not-so-good situation. Let’s imagine another scenario. Your friends Sarah and Shaun Brown have decided that the time has come for them to buy a house.
Sarah works as a hairdresser part-time, and her husband works part-time for a package delivery company. They have three children under 10, who are all itching to get out of the tiny apartment where they currently reside. Thus, they decide the time has come for them to get a mortgage and buy their own place.
The only problem: they don’t have enough consistent income to qualify for a mortgage. But, no worries, the Brown’s are quick thinkers. They tell the mortgage company that they are buying the house as an investment property. And the money they receive from renting it out will give them a consistent income. This sounds like a deal, and the Browns are now qualified for a mortgage.
One year down the road and the Brown family is happily situated in their new house. The house that they said would be rented. In short, the Browns have gotten wrapped up in a mortgage scheme called occupancy fraud, and could now face up to 30 years in prison.
Generally, occupancy fraud most often happens when a buyer does not correctly represent what his property will be used for. Many times the buyer will say that they are buying the house as an investment property and that the money they receive from renting will be the income used to pay the mortgage. However, in reality, they’re actually moving in the house to live there. Subsequently, they’re falsely getting themselves approved for a mortgage.
3 – Gifting a payment in an illegal way
Many times, as a special gift to help out, parents, grandparents, or close friends/relatives will give newly-weds or young adults a monetary gift specifically for a mortgage. They want to help out with the down-payment for the young peoples’ mortgage when they don’t have quite enough money. Generally, this is perfectly legal, and acceptable, until it’s no longer used as a gift. Giving the money as a gift means you give it to the buyer, without them paying you back. It turns into a straw purchase if the money is “gifted,” and then somehow paid back, even years down the road.
Straw purchases are entirely illegal, and participating in a straw purchase could mean heavy fines and even jail time. As long as there is no reimbursement, gifting money is legal, and a very kind way to help someone out.
How to avoid a scam
Obviously, there could be some pitfalls when getting a mortgage to purchase a house. And, clearly, you should steer clear of any illegal or unethical behavior when it comes to securing your mortgage. In short, you should do the right thing on your end—always.
Now, even if you’re doing everything properly, what about other people? As we mentioned earlier, getting a mortgage is a two-way street. Without a doubt, you should not perpetrate a scam. But what if someone tries to pull off a scam aimed at you?
Now that we’ve considered a few different kinds of mortgage fraud, we’re going to take a look at a few ways to help avoid falling into a scam. Taking your time and “doing your research” will save you time, headaches, and potentially an enormous amount of money.
1 – Get referrals
People often say, “you can’t trust anyone but yourself.” While this isn’t always true, you do want to be extremely careful with who you trust when it comes to mortgages. Subsequently, if you have friends who have recently bought houses, or know of a trusted company that’s still around since the time your parent’s bought a house, consider asking them who it was.
A few questions you might want to ask your friends or family would include these three: Did you feel safe giving them your information and money? Did you feel like they listened and cared about you? And did you feel like they gave you your money’s worth? With these questions, you can get a better idea of what the mortgage company is like before you’re on the inside.
Never sign a document with blank spaces
There’s basically never a legitimate reason for signing a blank mortgage document, or one that seems half written. Make sure you always read the entire document before giving away any information or signing your name. If it’s an illegitimate document, they may be getting you to sign, or basically agree to something, that will cost you a large amount of money, or will otherwise damage something.
Avoid loans that say, “no money down”
Many times these loans are a hoax and are a way to make you buy a house that you definitely can’t afford. Additionally, these loans have very bad terms and interest rates.
Beware of identity theft
Generally, identity theft can happen in numerous ways. Usually, it could happen from ne’er-do-wells searching through old garbage for any personal or bank information, that they can then use. Also, downloading off a suspicious website on to your computer may give you a virus that will attack your hard drive and steal personal information, and numerous other dangerous scenarios.
In short, to avoid these situations, never give your card or bank number out to anyone over the phone or email. And when you are throwing away an old bank card, cut it into tiny pieces, split the pieces up, and throw them in different trash cans around your house.
Reviewing the lesson: Real life mortgage fraud cases
There’s nothing like a few real-world examples to drive mortgage fraud home. So let’s take a look at some common types of mortgage fraud situations that definitely went south.
From 2001 to 2008, two stars from the TV show Real Housewives of New Jersey were involved schemes to obtain mortgages and other loans. Justice.gov says, “Giuseppe and Teresa Giudice allegedly engaged in a mail and wire fraud conspiracy in which they submitted to lenders fraudulent mortgage and other loan applications and supporting documents in order to obtain mortgages and other loans. The Giudices falsely represented on loan applications and supporting documents that they were employed and/or receiving substantial salaries when, in fact, they were either not employed or not receiving such salaries.”
In September 2001, Teresa Giduice applied for a mortgage loan for $121,500, and in the process, submitted a loan application in which she falsely stated she was employed as an executive assistant. She also submitted fake W-2 forms, etc, that were supposedly given to her by her employer. Subsequently, Teresa Giduice was sentenced to 15 months in federal prison, and her husband 41 months.
The Chicago scheme
In September 2013 The Chicago Tribune said that “Eleven residents of Chicago and its suburbs have been indicted in a $14.5 million mortgage fraud scheme that involved homes on the city’s south and west sides. The Justice Department said the alleged wrongdoing involved 10 properties, 52 home loans and straw buyers who were fraudulently qualified for the mortgages between August 2004 and October 2012. As a result of the alleged fraud, authorities said lenders lost $8 million.”
Now that you know
While it’s helpful to understand the potential pitfalls, don’t let them get you down. In other words, don’t give up on the idea of a mortgage. Millions have paved the mortgage road before you, so it will be a smoother ride, with fewer bumps. Make sure you know the right questions to ask and your ride will be that much easier.
Still worried about avoiding scammers? Stay tuned for our next article on Infamous Mortgage Scams In Michigan That Stole Millions of $$$.