What Is Mortgage Fraud?

The many steps involved in getting a home loan provide multiple opportunities for mortgage fraud. Mortgage fraud is a serious legal violation that can put your finances at severe risk, which is why it’s critical to understand how to recognize it and ways to protect yourself from becoming a victim or an unintentional offender. 

What is considered mortgage fraud?

Mortgage fraud is a financial crime that involves the falsification of loan documents with the intent to illegally profit from the mortgage loan process. This encompasses schemes that can negatively impact anyone involved in a mortgage transaction including buyers, sellers, lenders, and other parties.

Mortgage lender fraud is the deliberate act of deceiving a mortgage underwriter, lender, or other third-party involved in the lending process. This type of fraud targets lenders and could involve the misrepresentation of income and manipulation of property appraisals. One result of of mortgage lender fraud is to receive a larger loan amount than would have been provided by a lender with accurate information.

Anyone can commit mortgage fraud to either gain ownership of a property or steal funds. While there are many different types of mortgage fraud that can be committed, they generally fall into two categories: fraud for profit and fraud for housing.

Fraud for profit

Fraud for profit perpetrators are usually industry insiders who use their specialized knowledge or authority to deceive the general public. These insiders are often loan officers, home appraisers, mortgage brokers, real estate attorneys, and other professionals working within the mortgage industry. This classification of mortgage fraud aims to steal cash or equity from lenders or homeowners. Given the abuse of power involved in fraud for profit schemes, the FBI tends to prioritize these cases above others. 

Fraud for housing

Fraud for housing is usually committed by borrowers looking to acquire or maintain ownership of a house through misrepresentation of income or assets. Borrowers take illegal actions, such as falsifying documents, in order to get approved for a mortgage loan they wouldn’t otherwise qualify for. 

Types of mortgage fraud 

Mortgage fraud can be organized into many different types of schemes. Here’s a list of some of the most common types of mortgage fraud.

Occupancy fraud

Occupancy fraud is when the borrower lies about how a property will be occupied. In many cases, borrowers claim they plan to live in the property they’re submitting a loan application for, but in reality, they plan to live elsewhere and rent out the property or use it for another purpose — such as a second home or vacation home. This typically allows the borrower to qualify for lower mortgage rates, down payments, and closing costs, or higher loan amounts.

Example: 

A buyer submits an application for a first-time homebuyer loan to purchase a three-story, multifamily property. Instead of living in one of the apartments, the borrower rents out all three units to different tenants and continues living with their parents. 

Foreclosure relief scams

Foreclosure relief scams target homeowners who are about to default on their mortgages. Scammers approach these homeowners, claiming to be “foreclosure specialists” who can help them avoid foreclosure. These scammers convince homeowners to transfer the property title to their name, promising to let the original homeowner buy back the property once their financial situation has improved. However, the scammers don’t hold up their end of the bargain, and the owner ends up losing their house. 

Example:

A homeowner struggling to keep up with monthly payments is approached by a “foreclosure specialist" who convinces them to temporarily transfer ownership. The scammer promises to rent out the property and make mortgage payments for a year. Instead, the scammer takes ownership of the property, falsifies a home appraisal, and sells the home to a new buyer. The original homeowner is left without a house. 

Equity skimming

Equity skimming is a type of mortgage fraud that exploits a homeowner’s equity by taking control of their property and collecting rental income, without making any mortgage payments. Once the home is in their name, the scammer rents out the property and pockets all of the proceeds while letting the home go into foreclosure. 

Example:

A real estate investor is approached by a scammer who claims to be a real estate investor themselves. The scammer convinces the real estate investor to transfer ownership of one of their properties in exchange for managing the property and making high ROI home improvements. The scammer obtains ownership and rents out the property, without making any type of improvements or mortgage payments. The home eventually goes into foreclosure and the original owner loses their property. 

Asset rental fraud

Asset rental fraud happens when borrowers rent the assets of a third party to make their loan application more attractive to lenders. After their mortgage closes, the assets are transferred back to the original owner. 

Example:

A borrower might ask a relative to transfer large sums of money into their bank account before applying for a home loan. The borrower uses these bank statements to misrepresent their financial situation and get approved for a mortgage. After mortgage financing is received, the borrower transfers back the large sums of money to their relative’s account. 

Income fraud

Income fraud is similar to asset rental fraud in that the borrower misrepresents their finances. However, income fraud usually involves falsifying documents to prove a false stated income or employment status. 

Example:

A borrower needs a mortgage loan for $400,000, but their current income only qualifies them for $290,000. They create fake pay stubs and a promotion letter to make it seem like they’re earning more than what they actually are. The lender approves the borrower for a loan they’re unlikely to pay back.

Non-arm's length transaction

A non-arm's length transaction occurs when the two parties involved in a home sale know each other and conspire to deceive a third party, usually the lender. The two deceiving parties might inflate a property’s value, manipulate the home’s sales price, or hide important information to secure a larger loan. 

Example: 

Two business partners draft a purchase agreement in which business partner A agrees to sell one of their properties to business partner B for $3 million, even though the property is only worth $2.5 million. Business partner B secures a loan for $3 million using fake property appraisals. Once the transaction is complete, business partner B transfers the property title back to business partner A and the two split the loan funds. 

Straw buyer fraud

Straw buyer fraud occurs when loan applicants are not who they say they are. A straw buyer willingly acts on behalf of the true buyer to misrepresent the nature of the transaction. The true buyer recruits a straw buyer to impersonate them throughout the transaction in order to hide disqualifying characteristics, such as bad credit or bankruptcy status. After the straw buyer completes the transaction, they transfer the property title to the true buyer. 

Example:

An individual with a credit score of 400 recruits someone with a credit score of 750 to apply for a mortgage loan. The scammer promises to share profits from the future sale of a property in exchange for the recruit’s help. After closing, the recruit transfers the property title to the scammer.

Property flipping fraud

Property flipping fraud occurs when a home is purchased below market value and immediately sold for above-average profits. This is usually done with the help of a corrupt appraiser who artificially inflates the value of a property. Appraisal fraud can be committed by a single appraiser, or with the help of other real estate professionals, such as a builder or mortgage lender.

Example:

A scammer purchases a distressed home for $200,000. After obtaining ownership of the property, the scammer collaborates with a corrupt appraiser to immediately inflate the property’s value to $400,000, without making any value-adding renovations. The scammer then sells the property to an unsuspecting buyer for $300,000. The buyer thinks they’re getting a great deal and purchases the home quickly. After the home sale is complete, the scammer collects $100,000 in profit and leaves the buyer with an underwater mortgage. 

What is the penalty for committing mortgage fraud?

Mortgage fraud is a serious offense that can lead to prosecution and jail time. Under federal and state laws, mortgage fraud can result in up to $1 million in fines and up to 30 years in prison. In addition to criminal and civil consequences, perpetrators are unlikely to qualify for a mortgage or other loan in the future. 

How to protect yourself from mortgage fraud

In spite of these harsh consequences, people still commit mortgage fraud intentionally and even unintentionally. It’s important to know how to protect yourself from mortgage fraud to avoid becoming a victim, and how to submit an honest mortgage application to avoid committing it. Here are a few things you can do to steer clear of mortgage fraud.

Submit accurate documentation and be honest

When filling out a mortgage application, be sure to only include up-to-date financial documents that accurately depict your financial situation. It’s also important to be honest with your lender about your intentions for the property. Be candid about whether you plan to live in the property, or elsewhere. 

While you can certainly receive money from a loved one for a down payment, you shouldn’t pass this money off as your own. It’s important to disclose the details of financial gifts to your lender.

Review all loan documents and read the fine print

Purchasing a home is a major financial decision. Carefully read through all of your loan documents and ask questions about anything that’s unclear or inaccurate. Only sign documents you’ve had time to review and feel good about.

Pay close attention to property title documents and tax assessments. Title searches reveal who has rightful ownership of the property, which should confirm the seller has the right to sell the home. Title searches also notify the buyer of any liens on the property, such as unpaid property taxes or outstanding contractor payments. 

You can use the Zestimate® value shown in the property’s listing to get an estimated market value of the home and make sure it’s comparable with the asking price until you get an official home appraisal.

Work with reputable professionals

Consider getting referrals or checking online reviews before deciding to work with a real estate professional. By doing your due diligence, you can confirm you’re collaborating with reputable professionals that are experienced and easy to work with. Be on the lookout for red flags, like aggressive lenders, sellers, or investors, that try to pressure you into signing something you're not comfortable with. About half of buyers in a 2024 Zillow survey said their agent was the most helpful resource in their home buying experience, and two out of five said they used a referral from a real estate agent, realtor or broker when looking at financing options. 

Working with a real estate attorney could help shield you from a lot of scams. In many states, homebuyers are required to hire a real estate attorney for the closing process. However, even in states where a real estate lawyer isn’t required, it might be helpful to hire one. Real estate attorneys understand real estate lingo better than the average person and will be able to spot red flags in documentation and in practice. 

At Zillow, we offer several platforms to connect you with qualified real estate professionals. Consider working with one of our Premier Agent partners to find a home.

How to report mortgage fraud

If you’ve been a victim of a mortgage fraud scheme or suspect you’ve been targeted, there are a few ways you can report it:

• To make a report with the FBI, submit a report online or call 1-800-225-5324. 
• To tip off the Department of Housing and Urban Development, call 1-800-347-3735.
• To report a foreclosure-related scam and warn others, call the Homeownership Preservation Foundation's HOPE Hotline at 1-888-995-HOPE (4673).

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