Mortgage fraud is a pervasive issue that costs financial institutions billions of dollars.1 Nearly 1 in 120 mortgage applications contain fraud2, and unfortunately, most lenders only discover that fraud has happened after a borrower has defaulted on their loan.
As a mortgage lender, you need to develop a keen eye for the red flags of mortgage fraud. It’s believed that 70% to 80% of mortgage fraud could be avoided with the right early detection efforts.2
To help you spot the early signs of mortgage fraud, we’ve put together this helpful guide, where we’ll discuss:
- What is mortgage fraud?
- Why do people commit mortgage fraud?
- Common mortgage fraud schemes
- 70 signs of mortgage fraud
What is Mortgage Fraud?
According to the FBI, mortgage fraud is any “misstatement, misrepresentation, or omission concerning a mortgage loan which is then relied upon by a lender.”³
Mortgage fraud can be committed by homebuyers, sellers, appraisers, real estate agents, and other unscrupulous actors within the mortgage industry. In some mortgage fraud schemes, multiple people collude to facilitate the fraud. In others, one person perpetuates the scheme all on their own.
No matter who commits mortgage fraud, it’s a serious offense and can result in a 30-year federal prison sentence and up to one million dollars in fines!4
Motivations Behind Mortgage Fraud
Even though mortgage fraud has serious consequences, it’s still being committed daily. If you want to catch mortgage fraudsters, you need to understand their motivations for taking this risk.
Borrowers may commit mortgage fraud because they’re desperate to keep their home or buy a new one, but they don’t think they can get approved for a loan legitimately. As a result, they may resort to falsifying information, forging documents, or even asking an appraiser to misrepresent the value of their home.
Industry professionals may engage in mortgage fraud due to good old-fashioned greed. There’s a lot of money to be made in mortgage fraud, at least until you get caught.
Common Mortgage Fraud Schemes
Now that you know why people engage in mortgage fraud, let’s review a few of the most common mortgage fraud schemes identified by the FBI:5
- Document fraud — Some borrowers forge documents (such as bank statements, pay stubs, W-2s, credit reports, etc.) to improve their chances of getting approved for a mortgage. They may also inflate their income or claim to work at a fake company to qualify for a larger mortgage than they’d otherwise receive.
- Asset fraud — Asset rental fraud is when a loan applicant rents or borrows someone else’s assets to bolster their application.
- Straw buyer scheme — A straw buyer scheme is when someone asks a “straw buyer” (someone who has a better borrowing profile than them) to apply for a mortgage on their behalf. Once the loan is finalized, the straw buyer transfers the property’s deed to the real buyer.
- Stolen identity fraud — Stolen identity fraud is similar to straw buyer fraud. However, it uses an unknowing person’s identity to apply for the loan, rather than a straw buyer who is in on the scheme. The scammer will apply with the identity theft victim’s Social Security number and use other falsified documents. If the loan is approved, the scammer can get a mortgage on a property they don’t own or live in.
- Silent second — If a seller is eager to sell their home, they may lend a buyer money for a down payment in the form of a non-disclosed second mortgage. The buyer can then apply for a mortgage with a lender, using this borrowed down payment to secure the loan. Since the lender doesn’t know the down payment is borrowed, they may approve the loan under these false pretenses.
- Illegal property flipping — Property flipping is when a homebuyer purchases a property and resells it shortly after at a higher price. In most cases, property flipping isn’t illegal. However, it can become fraudulent if a buyer colludes with a corrupt appraiser to misrepresent the value of the home. For instance, the appraiser may undervalue the home during the purchase and inflate its value during the resale to maximize profits for the buyer.
- Occupancy fraud — Occupancy fraud is the fastest-growing type of mortgage fraud. It occurs when an applicant lies about their intended use of a property they’re trying to purchase. They may claim that they plan to live in it as a primary residence when they actually intend to rent it out. They do so in an attempt to secure a lower interest rate and down payment.
These are just a few examples of how mortgage fraud can be carried out. You can find more notable mortgage schemes on the FBI’s list of the most common types of mortgage fraud.
70 Signs of Mortgage Fraud
With scams like these taking place regularly, it’s important to spot the warning signs before it’s too late. Here are 70 red flags that may indicate a mortgage fraud scheme is underway:6
Mortgage Application Fraud
The majority of mortgage fraud cases involve misrepresentations on the mortgage application. Here are a few potential signs of this type of fraud:
1. The loan documents appear to be altered
2. The W-2s and bank statements have different mailing addresses
3. There are discrepancies in the Social Security number throughout the application
4. The applicant has the same phone number as their employer
5. Signatures vary notably across the application
6. Signatures and dates are missing in multiple places
7. The applicant’s assets don’t align with their stated income level
8. Document verifications come back unrealistically fast or on holidays or weekends
9. The loan is for an investment property, but the buyer doesn’t have a primary residence
10. The cash-out refinance loan is for a recently purchased property
11. The applicant’s income doesn’t correlate with the property’s price (this may indicate a straw buyer)
While there may be innocent explanations for each of these discrepancies, they’re worth investigating further to eliminate the possibility of fraud.
Sales Contract Fraud
Another place where you may find signs of fraud is within the sales contract. Watch out for these warning signs:
12. The seller is the buyer’s real estate broker, relative, or employer
13. The seller isn’t listed on the home’s title
14. The buyer isn’t the loan applicant
15. Buyers have been added or removed from the sales contract
16. A power of attorney is used
17. A second mortgage is suspected, but not disclosed
18. The real estate commission is unreasonably high
19. There’s no real estate agent involved in the sale
20. The sales contract date is after the credit report date
21. The name on the earnest money deposit check isn’t the buyer’s name
22. The earnest money deposit is abnormally large for the local housing market
23. Several deposit checks show inconsistent dates
24. The sales contract has very few fill-in-the-blank terms (this may indicate a fabricated negotiation)
Again, none of these signs are concrete evidence of mortgage fraud on their own. However, they’re worth looking into before you finalize the loan.
Some mortgage fraud schemes also utilize credit fraud. Some red flags of credit fraud are:
25. The applicant’s length of credit history is unrealistically long for their age
26. Their stated Social Security number isn’t consistent with other loan documents
27. Their Social Security number was issued recently
28. Authorized user accounts have better payment histories than the applicant
29. All of the credit accounts were opened at the same time
30. The applicant’s credit history doesn’t match their income or lifestyle
31. Original and new credit reports have significant differences
32. The credit report is missing pages or supplements
33. The credit report’s liabilities are missing from the mortgage application
These signs should inspire a deeper look into the borrower’s credit history and credit report. A credit report will provide most of the information you need to know about the borrower and should be compared to all information provided by the homebuyer.
Employment and Income Fraud
Another area to pay close attention to is the applicant’s employment history and income. Keep an eye out for these potential fraud indicators:
34. The applicant lists a very vague and generic job title
35. Their employer’s address is a P.O. box
36. The employer’s identification number is improperly formatted
37. You can’t get in touch with the employer
38. The applicant’s annual earnings are in even dollar amounts
39. Tax withholdings are improperly calculated or vary significantly each pay period
40. Paychecks are numbered abnormally
41. Pay stubs or W-2s are handwritten
42. Tax returns are not signed or dated
43. The applicant’s income seems too high for the type of employment listed
44. They earn a high income but don’t use a professional tax preparer
45. They earn a high income but have very little money in the bank
With advancements in technology, high-quality falsified documents can be generated, such as fraudulent W-2 forms, tax returns, credit reports, and more. In general, if an applicant claims to earn an income that doesn’t seem to align with their employment, age, education, or lifestyle, there may be fraud at play.
Misrepresenting assets is another way borrowers obtain mortgages they’re not qualified for. Here are some possible signs of asset fraud:
46. The applicant’s down payment comes solely from a gift or the sale of another property
47. They don’t use traditional banking institutions
48. Their checking account has an abnormally high balance
49. Their salary doesn’t match up with their savings
50. Their bank statement dates are out of order
51. Their bank statements don’t show deposits from their stated income
52. They share their bank account with unknown individuals
53. Their bank account balances are always in even dollar amounts
54. There’s no bank account withdrawal for the earnest money check
55. The earnest money comes from someone with no relationship to the applicant
56. Recent deposits don’t have a reasonable explanation or paper trail
57. A high-asset applicant’s investments are not diversified
While some of these signs may have reasonable explanations, it’s important to find out before you finalize the mortgage loan. If an applicant’s assets don’t align with the rest of their financial profile, it may be due to mortgage fraud.
Lastly, you should pay careful attention to the appraisal report. Many common mortgage fraud schemes involve a corrupt appraisal. You can detect this form of fraud from the following red flags:
58. The appraisal is for a refinance, but the loan is for a purchase
59. The appraisal’s description of the property doesn’t match up with the photos
60. The appraisal’s photos show weather conditions that are inconsistent with the appraisal’s date
61. The address shown in the appraisal photos differs from the one stated in the appraisal
62. The appraisal photos are taken from unusual angles
63. The appraisal report was completed before the sales contract was written up
64. The appraisal was ordered by a party to the transaction
65. The appraisal’s comparable homes are not similar in size
66. The map scale seems distorted to make comparables look closer than they are
67. The appraisal’s comparables were sold too long ago to be relevant
68. Several comparable homes are non-MLS sales
69. The property’s appreciation is unreasonably high
70. The property’s purchase price is notably higher or lower than the average market value
By scrutinizing the appraisal, you can protect your business from any collusion taking place between a fraudulent borrower and a corrupt appraiser.
Stop Mortgage Fraud in its Tracks
As you familiarize yourself with the potential signs of mortgage fraud, you’ll eventually develop an intuition for when things aren’t adding up. If an applicant’s profile looks too good to be true, it most likely is.
Fortunately, you don’t have to fight mortgage fraud all on your own. You can fortify your mortgage fraud prevention efforts with the help of automated tools, like the ones offered here at Certified Credit.
Certified Credit: Mortgage Fraud Detection Made Easy
As a leading provider of mortgage credit report services, we offer fraud and risk protection tools that can help you stop mortgage fraud in its tracks.
Our Certified fraud report can help you identify potential risks of fraud within your customers’ loan applications by highlighting discrepancies between the loan application information and public records.
Our fraud prevention services include:
- Two-tiered wire fraud prevention
- A liens and judgment report
- 4506 tax transcripts to verify 1040s, W-2s, 1099s, 1120s, 1065s, and more
- SSA89 Social Security number verification
- Real-time identity theft protection
- MERS lien reports
- ID risk review (which generates a risk score based on a borrower’s name, address, phone, SSN, DOB, OFAC, and FinCen watch lists)
- And more!
Reach out to us today to learn more about our mortgage credit report services and fraud prevention tools.
1Office of Justice Programs. Working Paper: Burning Down the House: Mortgage Fraud and the Destruction of Residential Neighborhoods.
2CoreLogic. CoreLogic Annual Mortgage Fraud Report: Fraud Risk Tops Pre-Pandemic Levels
3Van Education Center. Recognizing the signs of Mortgage Fraud.
4FindLaw. Mortgage Fraud.
5Experian. Here’s Everything You Need to Know About the Risks of Mortgage Fraud.
6FBI. Financial Institution/Mortgage Fraud.
7Fannie Mae. Common Red Flags.