Greed, ignorance, and good intentions are the various starting points for mortgage fraud. Whether a person is looking for a home to live in that's nicer than he can legitimately afford, or he's looking to flip a property to make a quick buck, mortgage fraud entails lying or hiding information from the bank to get more favorable loan terms.
There are two main types of mortgage fraud: "fraud for profit" and "fraud for house." While "fraud for profit" schemes are fairly clear-cut in their dubiousness, "fraud for house" is often committed by people who aren't aware of the seriousness of their actions. Some truly don't think of what they're doing as wrong.
"Fraud for house" is committed when a person falsifies her income or credit information in order to qualify for a home loan that she knows she couldn't qualify for based on her true financial circumstances.
Oftentimes this type of fraud seems innocent—after all who'll get hurt if I fudge the numbers just a little bit? However, as we've seen with the record number of foreclosures happening in recent years, too many people have gotten themselves involved with real estate deals
that they simply couldn't afford.
A single foreclosure can reduce the property values for everyone on the street, which can lead to entire neighbourhoods with slumping real estate values. Thus, one little lie on an application can have serious consequences: for the bank who never recoups their money, for the homeowners who lose their homes, and for the rest of the economy that takes a hit right alongside the real estate market.
"Fraud for house" cases commonly involve a buyer exaggerating their income on the application form, or in some cases, by getting financial aid from the seller without notifying the lender. This type of loan is known as a "silent second," where the seller offers to help the buyer come up with the down payment, while keeping the bank in the dark. This is problematic because the bank gets a false picture of the buyer's financial resources. The bank then authorizes a loan based on inaccurate information, and risks not ever getting their money back.
Another popular form of mortgage fraud involves what's known as a "straw buyer" or a "nominee loan." In this type of fraud, a buyer uses someone else's credit and income information on their loan application. He may decide to pay a person to use their information, or he might steal somebody's identity to get their data.
The person whose financial information is being used is known as the "straw buyer." She is simply the buyer on paper, and has no intention of ever living in the home or of making the mortgage payments.
For the bank, this situation is very risky. There is a person that they don't know that's living in the home. They could have very low income or a poor credit history, which means that the bank's chance of getting their payments is very slim. Fortunately, if the bank doesn't receive its monthly payments, it's within their rights to go after the straw buyer for remuneration.
Lenders check borrowers' financial information for a reason. They want to make sure that you get a home that you can actually afford. Buying beyond your means can result in a financial disaster for you, and major losses for the bank. While you may have your eye on an upscale property, if it's beyond your means, it's beyond your means. Lying to the bank to get the financing you need is illegal and unethical, no matter how sincere your intentions were.
