Mortgage fraud and scams are alive and well, and when you’re making such a big decision and financial purchase, it’s hard to know what’s real and what’s not. As the saying goes, “if it sounds too good to be true, it probably is.” Even so, plenty of Canadians fall into the trap every year, and many others engage in types of fraud themselves – anything to get into a home.
Fraud for Shelter
Mortgage fraud is known as ‘soft fraud’ and it’s defined as any time an person “intentionally provides inaccurate, fraudulent or incomplete information to a lender in order to secure a mortgage that they might not otherwise be granted,” according to the Canadian Bankers Association. There’s a wide range of actions that fall into this category, from borrowing money for the down payment as a gift when you fully intend to pay back the money or adding a co-borrower to the loan who won’t be living in the house with you, to more blatant tactics, such as falsifying appraisals or forging employment or income verification documents. Most of the mortgage fraud that takes place in Canada is known as “soft fraud” or “fraud for shelter”, where prospective homebuyers are committing minor acts of fraud to get into the home that they want and to get around the mortgage qualification rules, while still taking advantage of the low interest rates and other options afforded to well-qualified buyers.
When you really want to get into a home, it can be tempting to exaggerate the truth a little bit. If you only worked a 40-hour-week instead of 30; if you only had $8,000 more saved, if only your credit score was just 100 points higher. But before you cross over to the dark side, consider that the ramifications of mortgage fraud goes beyond just getting turned down for a mortgage. If your employer finds out that you tampered with their evidence, for example, you could be reprimanded, fired, or sued. And obviously, if your lender discovers that you’ve lied, your mortgage application will almost certainly be denied.
Fraud for Profit
Fraud for profit involves someone either forging documents or impersonating the homeowner for monetary gain. This can happen unbeknownst to the homeowner, such as when a fraudster registers forged documents that transfer the property into his/her name. This allows the fraudster, who now appears to be the real owner of the property, to obtain a new mortgage against the property, and then make off with the cash. This can be a nightmare if no payment is ever made on the property and the lender notifies the true owner that the account has gone into default. The owner must then take legal measures to regain the title of their house. A similar scenario can also happen if you fall behind on your mortgage payments and are in danger of heading toward foreclosure proceedings. An individual or company offers to take over your payments and make them on time with the catch being that you need to put the title in their name, and then you make the payments to them directly. They make no payments to your lender, you’re still on the hook for your mortgage, but no longer are on the title to your home.
Title insurance can protect both homeowners and lenders against losses resulting from many types of real estate title fraud, and it can be mandatory for a mortgage, depending on your lender.
We all know about the dangers of the Nigerian prince. But online scams don’t just go to the spam folder in your email inbox. Many home buyers will look for properties online, either to start their property search or to look specifically for private sales, hoping to bypass dealing with agents and middlemen altogether. But a good scam can just be an few clicks away; a seller asking for money in any form before you meet in person is a big red flag, as well as being reluctant or refusing to show you the property in question before asking for money.
Another scam, which is much rarer and riskier, is when scammers steal listings from reputable sites – listing information as well as photos – and place it all on another website.
Renting to own your home can be a good idea for people who are working on rebuilding their credit before buying a home or saving money for a down payment while renting the property. Good rent-to-own programs involve a plan and a set path to home ownership. Without the proper guidance, you could end up forking over cash and not be entitled to anything.
If the person you’re entering into the agreement with, either the rent-to-own company or the landlord directly, doesn’t want to sign any paperwork or involve a lawyer in the process, that’s a huge red flag.
It’s hard to know who to trust. A mortgage broker should be the person that you can lean on throughout the process, and answer any questions that you might have. But if the mortgage broker isn’t on the up and up, you could find yourself caught between a rock and a hard place.
Make sure that the mortgage broker that you choose is licensed. If a person is acting as a mortgage broker or agent without being licensed, they could be prosecuted for a violation of law. There are even a handful of legitimate mortgage brokers who give the industry a bad name, taking money in advance for forging documents.
Here are some tips from CMHC for avoiding fraudulent mortgage schemes and how to prevent yourself from committing mortgage fraud:
- Never deliberately misrepresent information when applying for a mortgage.
- Never accept money, guarantee a loan or add your name to a mortgage unless you fully intend to purchase the property. If you allow your personal information to be used for a mortgage, even for a brief period, you could be held responsible for the entire debt even after the property is sold.
- Always know who you are doing business with. Use licensed or accredited mortgage and real estate professionals.
- Never sign legal documents without reading them thoroughly and being sure you understand them. If uncertain, obtain a second legal opinion or, if necessary, the services of a translator.
- Get independent legal advice from your own lawyer / notary. Talk to your lawyer / notary about title insurance and other alternative methods of protection.
- Your lawyer will advise you if anyone other than the seller has a financial interest in the home or if there are any outstanding liens or tax arrears.
- Contact the local provincial Land Titles Office to obtain the sales history of any property you are thinking about buying, and consider having it inspected and appraised. An accredited appraiser will provide the property sales and MLS history.
- If a deposit is required, make sure the funds are payable to and held "in trust" by the vendor's realty company or a lawyer / notary.
- Be wary of anyone who approaches you with an offer to make "easy money" in real estate. Remember: if a deal sounds too good to be true, it probably is.
Buying a home is designed to be difficult. If something sounds too easy, or if a mortgage asks for money upfront, then proceed with caution.