Lenders Better at Policing Mortgage Fraud -- Signs to Watch For

Mortgage fraud is any attempt to deceive a party in order to induce participation in a mortgage transaction. And while lender fraud has gotten the bulk of the media coverage, according to the FBI's Web site, the majority of mortgage fraud is perpetrated by borrowers against lenders. However, while government has professed to being very interested in protecting the consumer, it's pretty much leaving it up to the lending institutions to protect themselves. Here's what they look for:

Red Flags of Mortgage Fraud

Lying about the intended use of the property: Fraud is fraud, even if the borrower intends to repay the loan in full. Some borrowers tells their lenders that they intend to live in a property, when in fact they are buying strictly for?? investment purposes. Is this really fraud if they repay their loan? Yes, this scenario is still fraud, and the borrowers may be criminally prosecuted for obtaining loans under false pretenses. By lying about your true intention, you'd cause the mortgage company to take on more risk than it planned, inducing the lender to make a loan on terms it would not have offered had it known correct information. So if you have investment properties already, expect lenders to look very closely at any purchase you claim is for personal use -- especially a "vacation" property in a nondescript area, or a "primary residence" 100 miles from your job.

Involvement of an attorney-in-fact: When someone is purporting to act on behalf of a property owner, there is the potential for fraud. If you have someone conducting a mortgage transaction for you, expect the lender to contact you to ensure that the loan is legit.

Title held by virtue of an unrecorded deed: In some states, it can take up to six months for a recorded deed to show up on a title search. When this happens, a seller might bring an unrecorded deed to expedite a closing. This could actually hold up your transaction if you do this -- as far as a lender knows, you might not actually be the owner, but a tenant who filled in a blank deed. The lender may also contact the previous owner of the property to make sure that you in fact own it.

Loan secured by property recently paid off: Usually, when someone sells a house, any remaining debt is retired with the proceeds from the sale -- this is called a due-on-sale clause. If it appears that the mortgage was repaid a few months or weeks before the sale, it may not be paid off at all -- the?? quit claim/release deed is forged. If you paid off a mortgage immediately before selling a property, expect that your lender will be called for verification.

Sale within a year of obtaining title: On average, people own homes for about seven years. Selling a home very quickly might indicate a property flipping scheme, where homes are rapidly sold and resold to straw buyers, inflating the price beyond a reasonable value. FHA and other lending institutions have strict provisions against property flipping and will question the value of property that has recently changed hands.

Excessive allowances: If a contract provides a $10,000 lighting allowance to the buyer, the buyer spends $1,000 of it and then uses the remaining $9,000 as a down payment, the allowance is actually a way seller-funded down payment and a violation of the loan agreement. If you are the buyer or seller, be prepared to provide receipts and proof of work done.

Buyer's check is from someone else: If the buyer shows up with a certified check drawn on someone else's account, it could indicate the down payment is borrowed, which would affect the terms of the mortgage.

Keep in mind that any deviation from a normal single family primary residence purchase could trigger a red flag.?? Be patient with your lender's requests for additional information -- after all, mortgage fraud hurts everyone.