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Keys to Recognizing Mortgage Loan Fraud


A real estate lawyer, two mortgage brokers and a businessman, in South Carolina US, conspired to bilked two mortgage lenders out of thousands of dollars. They pleaded guilty to conspire to skim money from fraudulent property sales in Charleston, S.C. and each could receive up to five years in prison and a $250,000 fine.

For any potential home buyer or any potential borrower for that matter to learn a lesson from the above incident is to be able to recognize mortgage loan fraud. While most lenders are up front and honest, there will always be shady characters who prey on weakness and seek to take advantage of those in need.

It is essential to trust your instincts, and your common sense, if you suspect loan fraud. For instance, common sense should tell you that if you're a poor credit record you cannot expect to get a super low loan rate. If your lender offers to use creative ways to get you a better rate, it is best to pass and look for another lender.

Likewise, if anyone involved with the process of buying a home and obtaining financing asks you to make false statements on the loan paperwork, or to do something else you feel is unethical, it should send up a big red flag. Lying on a loan application is illegal, and a sure sign of an unethical lender.

Before you can recognize and avoid loan fraud, it is important to understand just what loan fraud is. Loan fraud happens when anyone involved in the process of obtaining a mortgage loan, including the real estate agent, the appraiser, the mortgage lender, the attorney, the closing agent, the buyer, the seller or others, make false statements in order for you to qualify for a mortgage that is larger than you would otherwise be entitled to. Any false statement made to a lender is considered loan fraud.

While loan fraud schemes vary, there are a number of common ones that seem to pop up from time to time. These common loan fraud schemes include:

  • Misrepresenting the amount of, or the source of the down payment made by the buyer.

  • Any undisclosed rebates made to third parties, such as real estate agents, loan officers or mortgage brokers.

  • Providing an inflated appraisal value for a property which is to be used as collateral for the loan.

  • Providing false information regarding the creditworthiness of the buyer.

  • Misstating the actual amount of closing costs paid by the buyer.

  • Making false statements about who plans to live in the property. For example, claiming the home will be occupied by the owner when you really intend to rent it out.

Loan to Value Ratio Fraud

Another popular loan fraud scenario is known as loan to value ratio fraud. The loan to value ratio is an important number in the world of mortgage loans, and lenders use that ratio to determine the amount of mortgage for which a buyer is qualified. The loan to value (LVR) ratio designates the percentage of the home's value that is represented by the loan.

Loan to value ratio fraud works like this: when the buyer applies for a loan, the lender looks at the contract to determine how much the buyer is paying for the property. After the appraisal is received, the lender compares the appraised value to the purchase price. If the lender has previously determined based on the buyer's credit history that he or she qualifies for 95% financing, the loan will be 95% of the appraised value of the home or 95% of the purchase price, whichever is lower.

For a home valued at $100,000, that 95% would be $95,000. But if the buyer cannot close without 98% financing that would represent $98,000. The loan fraud happens if documents are falsified in order to help the buyer get the additional funding for the home.

Bogus Earnest Money Deposits

Another loan fraud scheme involves the claim of bogus earnest money deposits. This fraud involves stating that the buyer has paid more down that he or she actually has. For instance, the settlement statement may show those bogus funds as paid outside of he closing.

Undisclosed Concessions

Undisclosed concessions are another common source of loan fraud. This type of fraud happens when money is given to the buyer for the closing, but that money is not recorded on the settlement statement. For instance, the seller may give the buyer funds in order to complete the sales transaction, or the real estate agent may give back part of the commission in order to make the deal go through.

It is important to understand that any of these schemes are illegal, and that loan fraud is a federal crime. It is important to avoid these schemes, and not to associate with anyone who suggests you commit fraud to obtain the financing you need.


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