Spot These Common Mortgage Red Flags

According to real estate data firm CoreLogic, one in every 122 mortgage applications in the first two quarters of 2017 contained application fraud. With the Equifax leaks, more homeowners are expected to be vulnerable to mortgage double-dealings.

Mortgage fraud is a broad term that can refer to a wide array of activities. These can include posing as a borrower on behalf of the real individual who is actually making the purchase, claiming income and/or assets that the borrower does not have, or inflating an appraisal to get more from the property than it is worth.

Generally, mortgage fraud is categorized by the Federal Bureau of Investigation into:

(1) Fraud for Property

This type of mortgage fraud is committed solely by the borrower by making false representations on his or her application in order to acquire and maintain ownership of a house. These misrepresentations can take the form of falsified employment history, concealed debt, or embellished income. This scheme typically only involves a single loan.

(2) Fraud for Profit

Also known as Industry Insider Fraud, this type of mortgage fraud is mostly perpetrated by paid mortgage professionals spanning multiple loans. Gross misrepresentations involving tampered appraisals and false loan documents are done in order to gain illicit proceeds from the properties’ sales.

Here’s a list of the most common tricks pulled by either homeowners or supposed mortgage professionals:

Occupancy fraud

Lenders charge lower interest rates for properties designated by homeowners to be their primary residence. However, many of them actually intend to rent the property out. To avoid the hefty interest payments, they tell the lenders otherwise. This kind of deception is one of the most common types of fraud in the industry.

Under-the-table transactions

One of the most important requirements for a mortgage application is to establish your ability to repay the loan. That is, you should have a solid financial backing with bank statements that show your assets and income. If you cannot produce this proof, there’s a very likely chance that your application will be turned down. A large down payment, however, will persuade the lender to give you that much needed financing. Sellers who want to sell as soon as possible can instead give the borrower the money to pay for a hefty down payment under the table.

Inaccurate incomes

There are certain types of nonqualified mortgages called bank statement loans where a lender decides whether to loan you money or not based only on your bank statements. If the underwriter inflates that amount just to approve your application, they can be charged with lender fraud.

Repaying a gifted down payment money

Some mortgage programs allow a certain portion of your down payment money to be gifted upon the condition that it should not be repaid. However, there are cases that gifts are repaid under-the-table. This is also considered as mortgage fraud under the law.

Whether you are a mortgage lender or borrower, there are certain signs that can tell you of a potential hocus pocus with your mortgage transaction.

General Red Flags:

• verifications are completed on the same day as ordered or on a weekend or holiday
• the homeowner’s insurance is a rental policy
• different mailing addresses on bank statements, pay stubs, and W2 forms
• assets are inconsistent with the applicant’s income
• child support income is noted on the pay stubs, but not on the application

Credit Documentation Fraud

These include the falsifications in documents tackled above, including discrepancies in employment or personal financial data in your loan application.

• social security number belongs to the applicant
• discrepancies in the credit report
• multiple hard inquiries on the credit record
• the length of credit history is inconsistent with the age of the borrower

Appraisal and Property Valuation Fraud

• the location and type of comparables used are inconsistent
• the house number in the photos don’t match what’s in the appraisal record
• photos don’t match property description in the appraisal
• the name of the owner on record is not the seller
• the occupancy on the appraisal does not match the application
• usage of more than one non-MLS for comparables

Loan Package Fraud

Always see to it to verify any inconsistencies in:

• canceled checks
• income and asset information
• HUD-1 Settlement Statement
• tax returns
• the sales contract
• the title

Though there are plenty more tell tales of a potential mortgage fraud, these are the most recurrent ones per data. Being a victim of mortgage fraud can be a tad costly. Knowing these signs can hopefully save you from the financial headache of a botched mortgage transaction.