5 Ways to Avoid Mortgage Frauds in Real Estate Investing

Most Filipinos resort to lending institutions to help fund their dream house and lot in the Philippines. However, there are risks involving fraudsters prior to securing a property purchase. Oftentimes, the main targets are newbies in the business of real estate investing who run the risk of being duped into signing documents that contain falsified information and misleading terms and conditions.

But it's not only borrowers who become victims of mortgage fraud, but also mortgage lenders and industry professionals. As a result, any one of them could either be the victim or the scammer. In this article, let's discuss the different mortgage fraud schemes to avoid and how you can protect yourself from these fraudulent activities.

What is a Mortgage Loan?

It is a type of loan used to fund a house and lot purchase. Just like other types of loans, a mortgage comprises the amount you've borrowed, the interest rates you agreed to, and the loan terms. In the event of nonpayment, the mortgage lender has the right to take your property as collateral.

Two Types of Mortgage Fraud

Mortgage fraud refers to the deliberate misrepresentation of information that will be used to qualify for a mortgage loan. Mortgage frauds can be committed by either industry professionals or the borrowers themselves.

Mortgage fraud can be categorized into two types: Fraud for profit and fraud for housing.

Fraud for profit

The former is committed by mortgage professionals. This includes bank officers, mortgage brokers, real estate agents, appraisers, lawyers, and other mortgage industry insiders. Fraud for profit does not have the primary objective of securing a property purchase. Rather, it has the intention of maximizing its profits in a loan transaction and stealing money and equity from lenders and homeowners.

Fraud for housing

Fraud for housing, meanwhile, is committed by borrowers themselves or someone representing a principal borrower in a mortgage transaction. This is executed by means of providing falsified information about one's employment and asset details in order to seal a home deal. Borrowers may also tap, or be tapped by, an appraiser to deliberately miscalculate a property's true appraised value.

Examples of Mortgage Fraud

Below, we listed down four examples of mortgage frauds.

1. Income Fraud

The most common type of mortgage fraud for housing is the falsification of one's income in order to secure a mortgage loan. Lenders evaluate an applicant's financial capabilities by looking through their employment history, proof of income, and credit report. As a result, a borrower who may want to avail of a higher loanable amount would also declare a higher income amount than he or she actually makes.

2. Appraisal Fraud

Appraisal fraud is a fraud for-profit scheme committed by industry professionals. This mortgage fraud occurs when a professional property appraiser deliberately overstates a home's appraisal value in order to help either a seller obtain a more favorable pricing, or a buyer to get financing for a higher mortgage amount.

3. Occupancy Fraud

This mortgage fraud scheme is done by real estate investors to qualify for favorable loan-to-value ratios and obtain lower out-of-pocket expenses from the actual purchase to the mortgage rates. This fraud transpires when a borrower states that the property will be occupied by the owner. When in reality, it will not be owner-occupied but illegally leased out to another buyer who hasn't qualified for a mortgage.

4. Air Loan

Finally, industry professionals commit mortgage fraud called an air loan to obtain financing for a property and a borrower that neither of which exists. The perpetrators will then create a whole lot of fakeries — fake titles, fake phone numbers, fake addresses, and fake employment records, among others.

5 Helpful Ways to Avoid Mortgage Fraud

Save yourself from the perils of mortgage fraud by being smart and responsible with the way you transact with real estate professionals. The same applies to mortgage lenders and financing institutions which may fall prey to loan-applying fraudsters. We prepared five tips to help you make informed decisions throughout the home-buying process.

Also read: Important Tips to Avoid Real Estate Scams

1. Don't be a "straw buyer"

A straw buyer is someone representing another buyer in the mortgage lending process. It is fairly common for a third party to purchase a property on behalf of another, but straw buying is widely criticized as the nucleus of mortgage fraud scams. Straw buying is illegal if the buyer being represented is legally barred from purchasing a property.

The fraudulent activity occurs after the real buyer promises a fairly huge amount to compensate the straw buyer in exchange for obtaining a mortgage loan that the real buyer wouldn't qualify for due to poor credit rating and insufficient income sources.

A straw buyer will find himself at the receiving end of signing loan documents for one or more properties that he would never occupy, and be held accountable and potentially incarcerated if the scheme is found out. No matter how tempting an offer is to become someone's straw buyer, refuse to be an accomplice of their mortgage fraud.

2. Protect all your personal information

Identity theft is one common fraud scheme experienced by many industries. It is extremely important to keep all your personal information safe both online and offline. If you come across a spam text message or an email asking you to click on a hyperlink, block the phone numbers and email addresses for your safety.

The modus operandi is to promise extra income and fast money if you click on a malware-carrying website attached to their message. This will enable them to steal your data online and use it illegally. If you make mortgage payments online, it's all the more important to be cautious of your online transactions.

Also read: Mobile Banking Scams and Ways to Avoid Them

3. Read and understand everything you're signing

Not all scams are committed by false promises, but also for terms and conditions outlined in a contract that were deliberately undiscussed. No matter how tedious it is to read pages of a legal agreement, make sure to read and understand everything that you're signing.

If it becomes too overwhelming, what with all the industry jargon that you don't have much time to research on, tap a real estate attorney to help you comprehend the entirety of a contract, as well as to determine unfair terms to discuss with a seller or a real estate agent before any signing is made.

4. Compare other homes being sold in the same area

One of the abovementioned fraud schemes is appraisal falsification. This is the act of deliberately overinflating a property's appraisal value, which could be unrealistic from the fair market value (FMV) of the property.

As a smart and serious homebuyer, do your own research and inquire about similar homes being sold in the area and ask about each property's FMV to determine the legitimacy of an appraiser's assessment.

5. Hire an independent expert to help you have a safe homebuying journey

Finally, a potent way to avoid all these scams is to seek professional assistance through an independent anti-fraud expert. If you already suspect something to be fraudulent, a fraud expert can confirm or otherwise refute your suspicion and mark a transaction safe and scam-free. Every homebuyer deserves no less than peace of mind that their hard-earned money will not be lost in a scam.

At Lumina Homes, rest assured that you will only transact with real estate professionals who can help you attain your dream affordable house and lot for sale. With more than ten years of good legacy attached to our brand, an affordable house and lot purchase through Lumina Homes will surely satisfy you alongside premier lifestyle amenities on top of quality house models and features. Contact us today and become a Lumina homeowner this year 2023!