5 Red Flags of Mortgage Fraud
by : Stan Jaslar
Unfortunately, not everyone who comes to your bank looking for a home loan is honest. Some applicants may try to obtain mortgages fraudulently. To protect yourself from fraud in the loan origination process, you should keep an eye out for the following red flags.
Inconsistencies in the Credit Report
One of the most effective ways to safeguard against mortgage fraud is by pulling the borrower’s credit report during pre-approval and again before closing on the loan. If there are inconsistencies between the original credit report and the new one, that may indicate fraud.
In particular, if the most recent credit report shows that the borrower has taken out new loans, that changes their debt-to-income ratio, which may make them ineligible for certain loans and may also indicate future issues with staying on top of loan payments.
Additionally, some borrowers dispute items on their credit report before applying for a mortgage. While under dispute, these issues (liens, collections accounts, etc.) may be removed from the credit report. However, if you pull the credit report before finalizing the loan, those disputed items may be back on the report. Once in place, they give you a more accurate view of the borrower’s credit history.
Unexplained Payroll Deductions or Falsified Income Records
When looking at someone’s paystub, make sure that you look closely at all payroll deductions, not just gross income. If they have deductions for child support or garnishments from creditors, you should take that into account when reviewing the mortgage application.
In some cases, applicants may provide falsified payroll documents. In this situation, red flags include rounded up numbers, a different employer on the paycheck stub than noted on social media such as Facebook or LinkedIn, unprofessional letterhead, mistakes in the business address, inaccurate withholding amounts, and any other obvious mistakes.
Fraudulent Bank Statements
Anyone with a computer and a bit of tech knowledge can easily create a fraudulent bank statement. Rather than allowing mortgage applicants to print off and bring in their own bank account statements, you may want to consider accessing their accounts electronically. With the right software, you can generate a single-use pass code that gives you access to their account so that you can see the information you need. As always, remember to look at bank statements in detail, don’t just glance at the balance.
To protect yourself from mortgage fraud, consider applying this technique to all the statements you collect. For instance, instead of having an applicant bring in their own payroll stubs, have their employer send proof of income. Or, instead of having a self-employed person provide their own profit-and-loss statements for their business, you may want to turn to a tax return verification (TRV) service.
Unusual Distance Between Work and New Home
Most people don’t buy a home if it is a significant distance from their place of employment. If someone is buying a home that is more than an hour or two away from their work, you need to dig deeper. This may be a red flag that there’s an occupancy issue. Downgrading from a large, expensive home to a small, less expensive home for no apparent reason can also signal occupancy issues.
In this type of mortgage fraud, the borrower buys a house with the intent of renting it out. This may make the borrower eligible for loans that they couldn’t get if they were truthful about their plans to rent out the property, and at the same time, it reduces their mortgage insurance payments.
Significant Differences Between Appraisal Comps and the Home
Some mortgage fraud involves the appraiser. Typically, if the appraiser is involved, they overstate the value of the home. Then, if the sale price is lower than the appraised amount, the risk for the bank appears to be lower. As a result, the bank may agree to lend the borrower more money because the appraisal creates the appearance that the property has built-in equity.
In some cases, the comps (comparable properties) may be significantly different. For example, the comps could include larger homes, bigger lots, updated interiors, better HVAC systems, more garage space, etc. In other cases, the comps may be in different areas. When looking at the comp map, make sure that you understand the scale. If the appraiser is dishonest, they may manipulate the scale of the map to make it look like the comps are closer to the home than they truly are. Ideally, the comps should be in the same development as the home, and they shouldn’t be separated by major roads or waterways.
Running a financial institution can be extremely challenging, and unfortunately, scam artists are constantly trying to get money from your bank, take out loans fraudulently, or commit other types of fraud. To protect your business, you need fraud protection tools. At SQN Banking Systems, we make fraud protection easy for our clients. Contact us today.