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What constitutes mortgage fraud?

Mortgage fraud is a big business. Because mortgages often involve complex transactions with which the average property owner is unfamiliar, a dishonest realtor, broker or mortgage company can take advantage of sellers, buyers or those looking to refinance.

The results can be financially disastrous for anyone who gets caught up in these schemes. To avoid this havoc, it's important to do your research before taking out a mortgage.

Here are some of the most common types of mortgage fraud:

1. Inflated income amounts

If you're self-employed, your actual income may not be reflected on your taxes due to allowable deductions. Self-employed people will sometimes be allowed to use a "stated income" loan that is based on what he or she claims to own. If you're encouraged to inflate your income by the realtor or anyone else in order to pass underwriting, that's a sign of fraud.

2. Non-owner occupancy

If a buyer wants a property as a rental, he or she will usually pay a higher interest rate and have to put more money down. Buyers will sometimes lie and say that they're intending to make the property their home in order to get a better loan. That's a type of fraud that could land you in serious trouble later.

3. A second, "silent" mortgage

Sellers eager to unload a property may loan a buyer money for a down payment in order to get the bank to approve a high-risk buyer. The bank thinks the buyer is putting his or her own money down, never realizing that the buyer has taken out a second mortgage on the property already.

Other types of mortgage fraud tend to be run by pros and can wipe out a homeowner's hard-earned investment very quickly unless it is discovered. Regardless of your situation, it's important to have a real estate attorney look over any transaction you plan to make regarding your property or a property you hope to buy. If something feels like it might be illegal, or you're encouraged to do something "under the table" by another party, steer clear until you get good advice.

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