Mortgage Fraud – How to Avoid Mortgage Fraud

Written By: Glenn Michaels, Op-Ed Writer

If you lie on your mortgage application it’s mortgage fraud. Even though some lies and omissions constitute mortgage fraud. Many borrower’s hedge a little there, often because they did not know any better or worse. Sometimes borrowers are counseled by their mortgage loan officer and/or real estate broker to sell and close on that house.

A loan application with missing information or erroneous information is a big deal these days. A lender should discuss all false information discovered with the borrower, and loan originator. After discussing the false information with the borrower and mortgage loan originator the real estate broker may have to be informed as well in order to safe guard the lender’s reputation in this situation.

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What constitutes mortgage loan fraud?
The United States Federal Bureau of Investigation (FBI) defines mortgage fraud as “any material misstatement, misrepresentation or omission relied upon by an underwriter or lender to fraud, purchase or insure a loan.

Some other examples of mortgage fraud
• Undisclosed kickbacks: If you strike a deal with a home seller to give a big wad of cash or to slip a check across the closing table to pay for a new roof and if the lender does not know about it – because this is not disclosed in the contract of sale or contract addendums or in the closing statements – it is mortgage fraud.
• Silent Second Mortgage: A borrower without a down payment can commit mortgage fraud by borrowing the down payment from the seller in exchange for giving the seller a silent second mortgage, which is unrecorded or records after closing and hidden from the lender.
• Falsifying employment income: Stated Income Loans were originally created for the self – employed individuals whose income is difficult to verify, but some employed borrowers inflate their income above and beyond a W – 2...
• Non – owner occupant claiming occupancy: Lenders offer higher interest rates and less favorable terms to non – owner occupants because the lender’s risk is higher. If you do not intend to live in the property, don’t promise that you will.
• Down payment gifts you will repay: Both parties, the giver and the recipient, commit loan fraud if the gift is to be repaid. Gifts cannot be repaid.
• Inflated Purchase Price: If you have two purchases contracts and send the higher sales price to the lender with the higher sales price to the lender in hopes of obtaining a higher appraisal. It’s mortgage fraud.

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• Falsifying deposits: Dishonest borrowers who do not have an earnest money deposit might state in the contract that the deposit was paid outside of escrow, which is fraud.
• Professional mortgage fraud: Length of time in the business is no guarantee that your “trusted advisor” is not a crook. A mortgage broker got 30 years behind bars after defrauding more than 800 borrowers in a Ponzi scheme. A Missouri appraiser pleaded guilty to mortgage fraud and was sentenced to 20 years in prison plus a $500,000 fine. Schemes are happening every day. The newspapers are filled with them.

Mortgage fraud is real and happening everyday and all around you. You need to keep your eyes and ears open for all kinds of mortgage fraud.

About The Author

Glenn Michaels - As an NAMP® Opinion Editorial Contributor, Glenn Michaels is a mortgage underwriting instructor for CampusUnderwriter ( As a BBA & FHA DE Underwriter, Glenn is a Pace University graduate who also graduated from New York University’s School of Mortgage Finance. Glenn has conducted numerous training classes and has worked in the mortgage banking industry for 38 years. 


Opinion-Editorial (Op-Ed) Disclaimer For NAMU® Library Articles: The views and opinions expressed in the NAMU® Library articles are those of the authors and do not necessarily reflect any official NAMU® policy or position. Examples of analysis performed within this article are only examples. They should not be utilized in real-world application as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of NAMU®. Nothing contained in this articles should be considered legal advice.