Did You Commit Mortgage Fraud and Didn’t Even Know It?

Quick Quiz:

Which of the following could be mortgage fraud?

A. “You’ll get a better interest rate if you say you’re going to live in it.”
B. “Just get a friend to sign a lease for $900 to show more income.”
C. “I’ll hold a forgivable second mortgage that we’ll rip up after closing.”
D. “I’ll slip the appraiser a little extra if he brings it to $10k more.”
E. “We’ll just give you a $2,000 check for carpet outside of closing.”

Answer: ALL OF THEM!!

Do any of these sound familiar to you? They probably do if you’ve been investing for a long time…like more than 2 months! Mortgage fraud is running rampant in our country, and the result is it’s getting harder for legitimate investors to get financed and real estate fraud in general is the reason behind the recent push for legislation which would severely restrict investors, but that’s a whole other topic! The FBI notes that between 2001-2004, the number of mortgage finance violations increased 305%, from 4,225 to 17,127!

Maybe I should step back and tell you what fraud is. Fraud is legally defined as “the misrepresentation of a material fact which is made with knowledge of its falsity and with intent to deceive a party who in fact relies on the misrepresentation to his or her detriment and injury.” From a mortgage perspective to be considered fraudulent, the misstated or undisclosed information must be “material”, meaning that if the lender had known the information, it may have affected the approval for a loan. Fraud can result from written or spoken words, acts, or nondisclosure of information. The range of loan fraud is wide and includes everything from fibs about income and little white lies about assets to elaborate schemes and intricate scams that cost lenders millions of dollars.

The FBI investigates mortgage fraud in 2 distinct areas: Fraud for Profit and Fraud for Housing. Fraud for Profit is where the guilty party stands to make a profit or commission from the transaction and Fraud for Housing is where the buyer acts for the sole purpose of obtaining the property. Current investigations indicate that 80% of all fraud cases involve industry insiders such as brokers, appraisers & title companies.

“It’s not Fraud if I’m gonna make all my payments on time”

Many investors try to justify their actions by telling themselves they’ll never get caught as long as they never make a late payment, and there may have been a time when that was true, but not anymore! In a time where lenders are losing money on every fraud case, they have to safeguard themselves even after the loan closes and one way of doing that is to have agreements with their loan sources to “buy back” any bad loans. So the lenders actually get paid if they catch you!

Let’s jump right to the part where I tell you what not to do. This is not a complete list, but rather some of the more popular ones I’ve heard lately, and I’m skipping the obvious ones like giving a fake employer name, falsifying tax returns, white-out on your bank statements, get the picture? The items loosely follow the quiz questions at the start of this article.

A. Claiming you’re going to live in the property to get a better rate and lower down payment. Do you really think the lender would give you 100% financing at a 5% fixed rate if they knew it was a rental? The lingo they use here is o/o (owner occupied) vs. n/o/o (non-owner occupied) – don’t “accidentally” get them mixed up!

B. Inflating your income on stated and low documentation loans. It is estimated that 50% or more of ‘low doc’ loans have misrepresentation with regard to income. Let’s think this through – a lot of people do low doc loans because they cannot show, or do not make, enough money to qualify for the house. Therefore, they do a stated loan and inflate their income enough to qualify. Stated income, “just tell me how much you make, we don’t verify it” loans are an invitation to lie. I prefer a No Doc or No Ratio loan – this means you leave the box blank where it asks for income. Great Solution! No lying! Typically your interest rate will only be about .25% higher, a small price to pay to avoid possible prison time and a large amount of fines!

C. Having a “Side Deal” or another contract with different terms than the one the lender sees. This usually is thinks like Phantom 2nd mortgages, refunds of down payments, remodeling allowances, personal property in the deal, or just about anything else creative investors can come up with. These things are only fraud if you hide them from the lender, if you fully disclose them on your contract (the same one you give the lender) and they sign off on it, you are okay.

D. In many fraud cases, the appraiser is one of the pivotal players in getting the file accepted. This has led to many lenders being very critical of appraisals. But don’t think just because the appraisal is finished that you are stuck with the value given. Appraisals can be appealed and in many cases changed. Appeals are usually based on a mistake you find in the report (such as square footage), a new sale that has popped up, a sale they missed, or a mathematical error.

E. Every penny involved with your transaction must show up on the settlement statement, also called a HUD or HUD1. If you have already paid for an item, such as a pest inspection or survey, it will still show up, but will be coded as “POC” or Paid Outside of Closing. A better way to get the “carpet allowance” would be to have the seller pay $2k of your closing costs but ask your lender first, not all loan programs allow this.

Article presented by: Andrea “Andy” Tolbert. Read more of her articles at www.RealEstateInvesting123.com