Mortgage fraud occurs when borrowers try to deceive the mortgage lender while applying for a mortgage in order to get a mortgage they would not legitimately qualify for. In many cases, the borrowers work with the sellers and split their gains once the mortgage is obtained. Either way, the lenders wind up losing money. There are many types of mortgage fraud out there. Some of the most widely used types of mortgage fraud are listed below.
1. Occupancy Fraud
Occupancy fraud occurs when a borrower wants to buy a property for investment purposes but states that he intends to use it as a residence. This allows the borrower to secure a lower interest rate than what he or she would otherwise qualify for. Furthermore, many lenders are usually willing to lend more money for residential homes than they would for investment properties. Occupancy fraud also allows the borrower to cheat on his or her taxes. As an investment property owner, they are supposed to pay capital gains tax on the profit they earn on their investment property. It also allows the borrower to fraudulently claim tax credits on residential homes.
2. Income Fraud
Income fraud occurs when the borrower overstates his or her income when applying for a mortgage. Generally speaking, the more income the borrower has, the more the mortgage lender is willing to lend. Since most lenders will ask the borrower to prove that the income he or she claims is legitimate, the borrower usually needs to forge W-2 statements, bank records and tax returns in order to pull off this type of fraud. In some of the more extreme cases, the borrower makes up the employment history out of whole cloth, claiming a job or a position he or she doesn't actually have. The income fraud has a potential to backfire on the borrower. Since the borrower does not have as much money as he or she claims, the borrower is that much more likely to default on the mortgage.
Shotgunning occurs when the borrower took out multiple loans on the same property, with their total value exceeding the property's actual value. Each subsequent mortgage is junior to the mortgage to the one that preceded it. This means if, for example, the borrower took out three mortgages, the lender can't back the money from the third mortgage until the second mortgage is repaid. This makes it much more difficult for the lender to recover money it lent to the borrower if the borrower goes into default. Furthermore, because the overall value of those mortgages exceeds the value of the home, foreclosing on the home won't be enough to recover the losses.
4. Appraisal Fraud
Appraisal fraud occurs when a mortgage appraiser overstates the value of the property. This can work in one of two ways. Most of the time, the seller and the appraiser work together to pull off the scam. If the value is overstated, the home seller gets more money out of the buyer, allowing him or her to pay off the appraiser and still have plenty of funds left to spare. In other cases, the borrower and the appraiser work together. In this case, the borrower defaults on the property after a few months and allows the lender to put the house into foreclosure. At this point, the lender will try to sell the property to recoup the loss. But, since the value of the property was inflated, the lender would not be able to get back the money in full. Meanwhile, the borrower gets to keep the money. The borrower gives the appraiser some money for arranging this scam.