What Is Mortgage Fraud?

Buying a home is one of the biggest financial decisions most people ever make, and for scammers, it’s also one of the biggest opportunities. Mortgage fraud happens when someone intentionally provides false information during the lending process to obtain money, property or favorable loan terms. It can affect anyone, from first-time buyers to seasoned investors, and often goes unnoticed until it causes serious financial damage. Understanding how mortgage fraud works, and how to avoid it, can help you protect your finances and your future home.

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Who Commits Mortgage Fraud?

Mortgage fraud can be divided up into two main categories: fraud for housing and fraud for profit. Fraud for profit usually involves the folks who play a role in handing out loans. These can include mortgage brokers, lenders, lawyers and home appraisers.

By contrast, fraud for housing typically happens when potential homebuyers attempt to get mortgage loans using inaccurate or misleading information about their financial backgrounds.

Although there are different forms of mortgage fraud for housing, the term generally refers to securing a loan in a dishonest manner. Maybe someone applying for a mortgage deliberately left out certain information that could have made it harder to get preapproved for a mortgage. Or maybe he or she fudged the numbers in order to make the application seem more appealing. These sorts of practices are illegal. If caught, the perpetrator could face some hefty mortgage fraud penalties.

Fraud laws differ by state. Mortgage fraud can count as either a misdemeanor or a felony. Perpetrators run the risk of facing 30 years in prison and paying a $1 million fine if convicted of a felony through a federal court.

Types of Mortgage Fraud

Mortgage fraud comes in many forms, but it generally falls into two main categories: fraud for housing and fraud for profit. Both involve intentionally providing false or misleading information during the mortgage process, but the motivations behind them are different. Understanding the types of mortgage fraud can help homebuyers, investors and lenders recognize red flags before they lead to serious legal or financial trouble. The following are some common ones to watch out for:

Appraisal Fraud

This scheme is often a team effort. A group of mortgage professionals (appraisers, real estate agents, etc.) can collaborate to make a home seem like it’s worth more than it actually is. The people involved in the scam can earn more money with a higher sale price and sellers can pocket more dough.

In Cincinnati, a loan processor pocketed almost $400,000 after inflating appraisal values and devising fake companies to sell properties.

Air Loans

These kinds of loans are literally made up out of thin air, just as their name suggests. Brokers can draw up a loan for a home or building that doesn’t exist, using the names of made-up borrowers. They might even go so far as to try and trick those who look into the loans by inventing phone numbers, employees, addresses and appraisers. In the end, fraudsters can potentially walk away with hefty sums gained from these fake properties.

Occupancy Fraud

Occupied homes tend to come with a perk that isn’t available to buyers of homes that won’t be owner-occupied: lower interest rates on mortgages. In this specific scheme, someone trying to secure a mortgage loan might pretend that he or she is planning to move into the home to avoid paying more interest.

Identity Theft

In regard to mortgages, identity theft takes place if someone who wants to buy a house steals another person’s personal information in order to get approved for a mortgage loan.

Illegal Property Flipping

Say you want to get into real-estate investing. You could buy a house, fix it up and sell it to make money. This is known as house flipping, and it’s completely legal. Illegal property flipping, however, happens when an investor buys a home and then sells it using a fraudulently high appraisal value or by including fictitious details on documents for the mortgage loan.

Loan Modification Schemes

These scams often target homeowners struggling to keep up with their monthly mortgage bills by requiring them to pay extra fees. In exchange, borrowers are promised help (that they actually never receive) with adjusting the loan’s terms in their favor.

Foreclosure Rescue Schemes

If you find yourself having to go through a foreclosure, it’s a good idea to be wary of people who claim that they can assist you by putting their names on your house deed and making your mortgage payments for you until you can get your act together. You might lose your home if the trickster suddenly occupies it, sells it to make a profit or neglects to make any payments on it, allowing it to go into foreclosure.

How to Avoid Mortgage Fraud

Protecting yourself from mortgage fraud starts with awareness and diligence. Because these schemes often rely on misinformation or high-pressure tactics, the best defense is knowing what to look for and taking time to verify every detail before signing anything. A cautious, informed approach can save you from financial loss, and potential legal consequences, down the line.

Always choose licensed and reputable professionals when applying for a mortgage. This includes your lender, mortgage broker, appraiser and real estate agent. Check their credentials through state licensing boards or the Nationwide Multistate Licensing System (NMLS). Be wary of anyone who encourages you to exaggerate income, hide debts or sign blank documents. Legitimate professionals will never ask you to misrepresent information to “make the deal work.”

Take the time to read and understand every document before signing. Confirm that your income, employment and financial details are accurate on the loan application. If something doesn’t look right, like an inflated home appraisal or unexplained fees, ask questions until you get clear answers. Never rely solely on others to review your paperwork; your signature makes you legally responsible for the information provided.

Fraudsters often use urgency or promises of guaranteed approval to pressure borrowers into quick decisions. Be cautious of anyone offering deals that seem too good to be true, such as no-money-down programs without clear terms or foreclosure “rescue” offers that require upfront payments. If a situation feels rushed or unclear, take a step back and seek a second opinion.

Bottom Line

Mortgage fraud has become more common. When it happens, it threatens the whole housing market and prevents individuals from enjoying the home-buying experience. The FBI has taken strides to investigate mortgage fraud and make the public more aware of it by working with local groups and police units. You can protect yourself from fraud by fully understanding the terms of your mortgage and only agreeing to work with a professional whose credentials you have checked.

Tips on Avoiding Mortgage Fraud

A financial advisor can help you steer clear from mortgage fraud. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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