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Understanding Mortgage Fraud
Lying on a real estate loan application represents mortgage fraud. There is not little white lie when it comes to getting a mortgage on a loan. Unfortunately, many borrowers do just this to get a mortgage. Often mortgage fraud is done at the behest of professional real estate and/or mortgage brokers. Laws were enacted in the 1970s to protect underwriters and others from this process. The following are a few examples of mortgage fraud:
Undisclosed Kickbacks
This occurs when a home buyer and seller strike a deal to pay off the buyer to purchase the home or make repairs just to make the transaction go through, specifically if the lender is unaware of this ‘side’ transaction. Any transaction must be disclosed in the purchase contract. If a deal is made and all paper work has been completed, the lender has the ability to draft an addendum estimated closing statement.
Silent Second Mortgage
Silent Seconds occur when, if a borrower does not have appropriate funds for a down payment, he actually borrows the money from the seller of the home to meet the downpayment obligation. Borrowing the money is appropriate, however, not reporting the transaction or engaging in a silent second mortgage on the property is mortgage fraud. Any transaction that gives another person a lien on the property must be recorded.
Falsifying Employment Income
It is improper to arbitrarily inflate income on a mortgage application. This process has occurred with increasing frequency because underwriters allowed buyers to ‘state’ their income. Stated income loans became increasingly popular because many buyers are self-employed and it is hard to verify their income. Unfortunately, because of their income situation, many borrowers inflated their income to qualify for the size and scope of housing that they wished to purchase. This is considered mortgage fraud even if the borrower is able to repay the mortgage.
Non-Owner Occupant Claiming Occupancy
Lenders finance non-owner occupied homes at a significantly higher interest rate because there is a higher risk of default and foreclosure on these properties. In this case, many buyers attempted to ‘game’ the system to reduce their interest rate. They often state that the purchased property would be their primary domicile or residence. This is mortgage fraud. Anyone who intends to live in a property must pledge that they will do so.
Downpayment Gifts to be Repaid
A gift is a gift. If a buyer and a seller declare a downpayment or some other financial exchange is a gift, then it cannot be repaid using side deals. The buyer and sell commit mortgage fraud if the gift is given, but is negotiated to be repaid.
Falsifying Deposits
Mortgage brokers and underwriters require a history of bank deposits to show responsibility and cash-on-hand. This is an important step in understanding the risk of a potential buyer. If a buyer borrows money to place into their account to demonstrate that they have earnest money deposits, that can be construed as mortgage fraud.