Image courtesy of Wikimedia Commons, Handcuffs
Whenever there is money to be made or money to be spent, some unscrupulous folks will take advantage, trying to game the system or commit all-out fraud.
Getting a home loan is no different. There are all sorts of mortgage scams out there. And people involved in various aspects of the process—borrowers, lenders, and sellers—commit them. This post will help you learn what to watch out for if you're in the market for a home loan, and it will let you know the consequences of committing mortgage fraud yourself.
Different rules apply when you're buying a home you plan to live in as your primary residence versus one that you intend to use as investment property. Rules also differ if the home will be a vacation home, otherwise known as a "second home."
Investment property: An investment property isn't your primary residence. It's an instrument that you buy to make money. It could be a single-family house, a condo, a townhouse, or an apartment building that you plan to rent out. Investment property could also be commercial property, or it could be property that you intend to flip—property that you intend to fix up and sell at a profit.
The loans you get for investment property typically come with higher interest rates—maybe half or even a full percentage point more that what you'd pay for a mortgage loan for a primary residence. This could translate to an extra $100 or $200 more a month. Loans for investment property also often require bigger down payments than both primary residences and vacation homes do.
Vacation home: A vacation or second home is property you buy that you will use as a residence for part of the year. This second home could be a lake house, a condo on the beach, a cabin in the mountains, or a place in the city that you use for business, just to give a few examples.
The loan rules can be strict with second homes because loans for second homes usually come with lower interest rates than loans for investment property do. Typical rules from lenders might include that the home is in a vacation area or near your work. You might need to sign a rider saying you agree to use the property exclusively as your second home and that you will not rent it out or use it as a timeshare. If you plan to rent this vacation home part of the time and use it yourself part of the time, you would need to get an investment loan instead of a second home loan.
The fraud: Because the rules favor people who use a home as their primary residence or second home, some people fraudulently say the place is their primary residence when it really isn't. And by some, we mean a lot. Occupancy fraud is one of the most common forms of mortgage fraud, according to The Washington Post. And this scam rose 20% from 2011 to 2013, the years Fannie Mae sampled this type of fraud.
One reason occupancy fraud is so prevalent is the belief many people have, which is, "Who's going to find out?" They figure the lender won't take the time to come knocking on their door to see whether they're really living there or not. That thinking is wrong. Lenders have always used "door knockers," although there are probably a lot of misses in that system.
Lenders today are more sophisticated, however. They know people often lie about their intended use of the home. So lenders now use fancy algorithms to find fraudsters. While lenders and risk management firms probably don't want to divulge all their secrets, you can pretty much count on the fact that they can search public records to determine where you really live—records such as your utility bills, your credit bureau files, your tax data, and so much more.
The penalty: So what happens if you lie? Lenders can stop doing business with you and call in the loan. If you won't pay it in full right away, expect foreclosure proceedings to follow. Sometimes lenders turn you in to the government by filing a report called a Suspicious Activity Report (SAR). This puts you in a database that lenders look at. If you wish to take out another mortgage or refinance a mortgage, and a lender sees your name come up with a SAR, you might not get the loan. And if you've done this before with other properties, you might receive an unwelcome visit from the FBI. You've just committed mortgage fraud, which can involve a permanent residence in another place: prison.
The bait-and-switch mortgage scheme works the same way as all bait-and-switch schemes do—consumers are lured in with products that seem too good to be true, and they often are. It's illegal to advertise products that are used solely as teasers. Unscrupulous retailers (and increasingly, mortgage lenders) do this: advertising products meant only to attract consumers.
The real intent is to upsell or to charge more than the advertised price or rate. The bait-and-switch mortgage scheme involves lenders who advertise super low mortgage rates to an audience that probably won't qualify for those rates … if they exist at all. When interested home buyers come in to ask about the low rate, the lender offers another deal.
Here's how one case went down: Amerisave Mortgage Corp. from Atlanta, GA. Amerisave routinely lured in customers with teaser rates. The rates they advertised either never existed or were much lower than what most Amerisave customers could ever actually get.
Then, when the borrowers took the bait, Amerisave charged high upfront fees and illegally overcharged for services. They did this by requiring their customers to order and pay upfront for a home appraisal. This made it unlikely for customers to shop around after already spending money at Amerisave.
Even worse, a company affiliated with Amerisave did the appraisals. And even worse yet, Amerisave also charged its customers for something called an "appraisal validation" report. And you guessed it. The company providing this service was also affiliated with Amerisave, and this affiliate company marked up the reports a whopping 900%. Amerisave told its customers they were getting a "special deal," according to the Consumer Financial Protection Bureau (CFPB). Only after paying hundreds of dollars to Amerisave did consumers realize they would not get the advertised low rates.
The penalty: The CFPB, after discovering how Amerisave was doing business, ordered the company to pay back $14.8 million to its customers and pay a fine to the government of $4.5 million. Amerisave's owner, Patrick Markert, was ordered to pay a fine of $1.5 million. And, of course, Amerisave had to change its advertising tactics and now must disclose to consumers when it will use an affiliate company.
This fraud is a simple one committed by borrowers: They claim they make more than they really do in order to qualify for a mortgage loan. If you're a fan of reality TV, The Real Housewives of New Jersey, in particular, you might know that two of the stars of that show, Teresa and Joe Giudice, were convicted of bank and bankruptcy fraud. Their crime spree began, however, when they allegedly overstated their income to get mortgages.
You might think fudging the numbers can't hurt anyone, and besides, everyone exaggerates from time to time, right? Not exactly: Lying about your weight or how fast you can run a mile is one thing. Lying on an official loan document is another. But people do so all the time because, in order to get a mortgage loan, your total monthly debt typically cannot be more than 43% of your gross monthly income. This guideline is there for a reason. Even if your lender somehow approved your loan with your bogus information, then what? If you're not bringing in enough money to afford the mortgage payments, you won't have the house for long.
It's super easy for lenders to discover this lie. Lenders generally don't just take your word for your financial information. They typically verify your income by requesting to see your tax returns and pay stubs. And don't even think about altering those records. There's a big difference in the law as to what constitutes mortgage fraud. If you made an honest mistake when you reported how much you make, you'll probably just need to redo the application with the correct figures. But if you knowingly lied, you've committed fraud. One way to tell whether a borrower has made an honest mistake or has lied is if they altered financial documents.
The penalty: If you've actually gone so far as to falsify documents to make it look as if you make more than you really do, you would have committed mortgage fraud. This crime is punishable by up to 30 years in federal prison, a fine of $1 million, or both.
Flipping houses is not a crime. Flipping merely consists of buying a property at a discount price, typically a fixer-upper or a foreclosed property, which needs a lot of TLC. The flipper then puts money into the house so that they can sell it at a profit. Many people make a living doing this, or they do this as a side job. But there's an illegal underside to flipping, which some dishonest people engage in.
The scam: The house flipper buys a distressed house or a house at a huge discount. But this time, little or nothing is done to the home to improve it or to make it more valuable. Instead, the flipper gets an unethical appraiser to give a false appraisal for a kickback, stating that the home is worth far more than it really is. Maybe the flipper did some slight cosmetic renovations, just to say that something was done, but nothing to warrant the huge increase in the house's value. Then, the unsuspecting buyer pays the inflated price for the home, only to discover later that major repairs or renovations will need to be done.
This scam was common before the mortgage crisis of 2008. Right after that, appraisers were careful to not appraise too high. In fact, many home buyers have been victim to super-cautious appraisers who appraise too low. If that happens, the buyer often cannot buy the house because lenders lend based on the appraised figure, not the buyer's offer. That leads to a decline in housing prices because of devalued property. But that's another story. An analysis conducted by Digital Risk Analytics and reported by The Wall Street Journal found that, beginning in 2011, just three years after the housing crash, about one in seven house appraisals were inflated by 20% or more.
Rent-to-own, just like flipping houses, is not a scam, but it tends to attract a dark underbelly, which does enter scam territory. When rent-to-own is done correctly, the potential home buyer rents the home with an option to buy it at an agreed-on date, generally between one and three years later. But it's not quite that simple.
How rent-to-own works: The renter who wants to buy usually needs to pony up some option money to the seller, which could be between 2.5% and 7% of the price of the home. Some or all of this option money can be applied to the purchase price, depending on the deal struck between the seller and buyer. Part of the rent paid during the rental period can also be applied toward the purchase price. Usually in those deals, the rent is more than it is under a standard rental agreement. The overage is what goes toward buying the house. If the buyer decides not to buy after all (either because they changed their mind or they can't afford to buy), they lose all the money (option and rent overage) they put in.
The scam: Some people prey on folks who might be having a difficult time financially. These people don't qualify for a mortgage, but they would like to own a home. So rent-to-own is a great solution … if it's legitimate. But scammers advertise that they have rent-to-own homes, and they even provide photographs, when they really don't. They then say they will put people in one of their homes … for a fee. That's the scam. People pay the fee and find out later that there are no homes and that the photographs are just stock photos or photos of random homes the scammer found online. This is almost like a catfish scenario, but instead of the catfish being a potential romantic partner, the catfish in this case is a home.
Not really a scam, but a gray area: Many people get into rent-to-own deals with an optimistic attitude that in one, two, or three years' time, they'll be able to afford and to get financing to buy a house. But the reality is that many people can't get financing to buy a home when the lease period is over. At that point, they either become regular renters, or they leave. Either way, they forfeit all or some of their option money, depending on their particular deal, and all the rent money that was going toward the house. Some people feel as if owners are being exploitative in rent-to-own situations. They may be in some cases. If one owner is involved in multiple rent-to-own deals with the same property, they might be doing those deals only to pocket the option money, while looking for ways to cancel the deal. For example, if the buyer didn't make an agreed-on repair or was late with rent, the deal might be immediately off. But then again, other rent-to-own cases are just business deals that didn't work out, which is what puts this in the gray area and not necessarily a scam.
We hope that by understanding some of the mortgage scams out there, you won't fall victim to one. Never pay an upfront fee for a loan or for a chance to own a home. And always seek the help of a professional to help ensure the deal you're making is legitimate. We also hope that you won't consider engaging in a scam to get a better deal for yourself or to get a mortgage. Lying on mortgage applications can get you in serious trouble.
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