In the past few months, several high-level politicians, including a US Senator, a Federal Reserve governor and the Texas state attorney general, have been accused of mortgage fraud. And last year, the FBI received about 3,600 reports of potential mortgage fraud from lenders. That’s just a tiny percentage of the six million mortgage loans originated each year in the US, but the real estate market is ripe for an increase in mortgage fraud now because of high mortgage rates, elevated home prices and a slow housing market.
What Is Mortgage Fraud?
Mortgage fraud is when a borrower deliberately misrepresents or omits financial information used by underwriters or lenders on a mortgage loan application.
It may not seem like a big deal to pad how much you make or tell a few white lies to qualify and secure better loan terms. But lenders are now better at detecting mortgage fraud…and the consequences for the applicant can be severe. Because many government agencies and enterprises such as Fannie Mae and Freddie Mac own the loans, committing mortgage fraud can be a federal crime with a penalty of up to 30 years in prison and $1 million in fines.
Common Types of Mortgage Fraud
Income fraud occurs when the applicant inflates how much he/she earns on the mortgage application. A higher income improves the applicant’s debt-to-income (DTI) ratio—the percentage of gross monthly income that goes toward paying monthly debt obligations. Lenders use this ratio to assess the applicant’s ability to manage debt and repay a home loan. A DTI of 36% or less generally indicates a stronger financial position and increases the applicant’s chances of approval and securing a better interest rate.
Occupancy fraud is when the applicant mispresents his intent for the property. Example: He claims a home will be his primary residence when he actually is planning it to be a vacation home or a house he rents out. A mortgage for a principal home often allows an applicant to borrow more money, put down less cash and receive one-quarter to one-half percentage point lower interest rate. Lenders believe people who live in the home are less likely to default on the loan.
Similar: Reverse-occupancy fraud, in which the borrower misrepresents an owner-occupied home as a rental property. Borrowers typically do this to show rental cash flow and higher income when trying to qualify for a loan. Example: A mortgage applicant might pretend to expect rental income of $1,000 or $2,000 a month when she actually will make no money from the property.
Preventing Problems on Mortgage Applications
Any of the following can cause you to be accused of mortgage fraud…
Characterizing a down-payment loan as a gift
Homebuyers who have trouble making a down payment on their own may ask to borrow money from a friend or relative but represent that money as a gift rather than a loan that will need to be paid back with interest.
Fudging your work history
Lenders typically like to see two years of steady employment on an application—this implies reliable income and greater certainty that the homebuyer won’t default. Some applicants embellish their employment records to claim longer employment periods, inflated job titles and higher earnings…or create a fake employer online and put down the number of a friend who vouches for them if the lender calls the non-existent company. Reminder: Lenders typically ask for and compare tax returns and recent pay stubs to confirm your actual income and where you work.
Failing to disclose all debts
A person might be tempted to omit financial obligations such as credit cards or an auto or student loan in a misguided attempt to improve the applicant’s debt-to-income ratio, making him appear less risky to lenders.
Not being candid about your occupancy plans
Applicants who plan to rent out some or all of the home should speak with their lenders first to avoid any possible consequences. Homes used for rental income must follow specific mortgage guidelines and adhere to rules about if and when the house can be rented out after purchasing it as your primary residence.
Applying as a co-borrower
This is not considered fraudulent, but it does create considerable risk for the joint borrower. Applicants who won’t qualify on their own for a loan sometimes enlist friends or relatives as joint borrowers on a mortgage. The loan is listed as an obligation on the joint borrower’s credit report, and he is liable if the homeowner fails to keep up with the mortgage payments.
