Don’t get caught in a trap of committing mortgage fraud – the consequences can be prison time, a hefty fine, or a black mark on your credit report. Whether you have a mortgage or in the process of getting approved for one, it’s important to understand what mortgage fraud is and how to protect yourself.
We’ll talk about what mortgage fraud is, what the penalties are, and how to protect yourself.
What is mortgage fraud?
In plain, mortgage fraud is the willful act of providing false information, facts, and figures, either by people who are looking to secure financing or investors who are looking to secure funding.
There are two distinct types of mortgage fraud, fraud for profit and fraud for housing.
- Fraud for profit occurs when people with insider information or authority, such as appraisers, collude with other parties to steal cash and equity from lenders or homeowners.
- Fraud for housing occurs when a prospective homeowner is looking to secure funding for a house and falsify information on a loan application.
Both financial lending institutions can be victims as well as prospective homeowners – especially those in vulnerable positions like impending foreclosure.
Common fraud schemes:
Straw buyer – A straw buyer is an individual who allows their information to be used to secure financing for a home for someone else that would not have otherwise qualified by themselves. Usually, the straw buyer is offered a financial incentive. It’s important to note that not every straw buyer has become one intentionally – it could be a case of identity theft.
Illegal house flipping – Usually, if one flips homes, they make improvements to the property that increase its value. Illegal house flipping is there have been no improvements or minimal, but the sale price is inflated to reflect improvements nonetheless.
Appraisal fraud – Appraisal fraud occurs when an appraiser deliberately inflates the value of the home beyond its fair market value. Sellers and purchasers can also commit appraisal fraud by altering an appraiser’s report of the value of the home or by bribing an appraiser.
Air loans – This typically involves a mortgage broker who fabricates a property and a potential homeowner to profit off of the loan provided by the financial institution. Once the loan defaults, there is no way a lender could recoup their loss.
Mortgage penalties vs. mortgage fraud:
Mortgage penalties can come about due to refinancing, switching lenders for a better rate, or selling your home before your mortgage term is complete. These actions are not fraudulent but can result in large penalty fees.
However, if your lender discovers that you have willfully misrepresented information on your mortgage contract, they may demand the full amount due or foreclose on your home. Your lender will be able to differentiate between fraud and typical mortgage changes that can incur penalties.
How are mortgage penalties calculated? Every lender is different, but most of them will charge the equivalent of three months of interest or charge a differential interest rate – which is a calculation of how much interest the financial institution will lose by allowing you to break the agreement early.
Are there penalties for paying off a mortgage early? There can be, yes. But, even if you pay your mortgage off early, the bank is still losing out on the interest it would have earned had you kept your original mortgage term. However, on most new mortgage contracts there is usually an amount that you can pay before incurring prepayment penalties. Be sure to reference your contract.
Ways to protect yourself:
Do not give personal information over the phone – Be wary of anyone who pressures you to provide information over the phone.
Don’t carry your SIN card – Your SIN card should be kept in a safe location in your home. If your wallet or purse is stolen, this can put you at risk for identity theft.
Check your credit report regularly – Both Equifax and Transunion have easy online services that allow you to check your credit report. Be sure to report or dispute anything suspicious.
Reach out to Axiom Mortgage Solutions today!
We understand that mortgage contracts can be overwhelming. If you’re in Leamington or Tecumseh, Ontario, we’ll help you secure the best rates possible and guide you through any questions and concerns.
Call us at (519) 326-4978 for our Leamington office or (519) 735-1440 for Tecumseh. Alternatively, you can fill out our convenient contact form!
