Mortgage Fraud Red Flags

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Mortgage fraud is the term used to describe all activity that misrepresents or omits important information on a mortgage application, with the intent to omit information. Mortgage fraud is a criminal activity. There are many methods in which mortgage fraud can be achieved. Both lenders and sellers should be aware of these red flags that can signal mortgage fraud so they are not victimized.

Quit Claim Deeds

A quit claim deed is a quick way to transfer title of a property from one person to another. This document states the seller is transferring any interest they might have in a property to the seller, without guaranteeing that they actually had any interest in the property being transferred. Usually quit claim deeds can be written by the seller and then recorded in the county courthouse without having to pay an attorney to handle the transaction.

Usually mortgage fraud is performed using quit claim deeds where a seller sells a property that they actually do not own to an unsuspecting buyer through the conveyance of a quit claim deed. If someone is attempting to sell a house using a quit claim deed, be aware that they may not actually be giving you clean title to the property. You should always involve a title company and have them issue title insurance so that you own a property free of liens or encumbrances.

Builder Bailout

During periods of depressed housing prices, builders can face difficulties in selling their homes. In order to sell the property, the builder will work with an unscrupulous appraiser and a mortgage lender. The appraiser will generate appraisals well above the actual value of the property. The lender will then originate a loan to a buyer based on this price. All three parties will then split the profits of the sale.


A flip is the quick sale of a property from one seller to a buyer, who will then quickly sell the property to a new buyer. Flips are used to artificially inflate the actual market value of a property. For example, a house that is worth $100,000 is sold to a buyer for $150,000. This buyer will quickly sell the property to an unsuspecting buyer for $125,000. The buyer believes they are purchasing a property below market value when in reality they are over paying for the property. The two sellers will pocket the $25,000 profit.

False and Misleading Information

Mortgage fraud can be performed by buyers who want to purchase a house that they would probably not have qualified to purchase. They do this by submitting false paystubs. Another method is to have a non-working spouse suddenly running a home based business that generates income. The information to support this business is false but the income will be used to qualify for the mortgage.

There are many ways both sellers and buyers can commit mortgage fraud. Buyers should be aware of these schemes so they do not fall victim to the prevalent scams in the mortgage industry.