5 Mortgage Fraud Red Flags: What Every Homebuyer Should Watch For

While most real estate transactions are honest and straightforward, mortgage fraud remains a growing concern. Fraudsters use deceptive practices to exploit unsuspecting home buyers, lenders, and investors—leading to devastating financial and legal consequences.

Whether you’re a first-time buyer or a seasoned investor, knowing how to spot mortgage fraud red flags can protect you from scams, inflated loans, and even criminal liability. This guide will cover the five most common warning signs of mortgage fraud, how they work, and what you can do to protect yourself.

What Is Mortgage Fraud?

Mortgage fraud occurs when someone intentionally misrepresents or omits information on a mortgage application or related documents to obtain a loan or property under false pretenses. Victims can face foreclosure, damaged credit, or legal consequences—even if they didn’t know they were involved.

5 Mortgage Fraud Red Flags Every Homebuyer Should Watch For

To safeguard against mortgage fraud, keep an eye out for the following common red flags:

1. Inflated Income or Employment Claims

One of the most common types of mortgage fraud is income misrepresentation. A fraudulent broker or lender may encourage a buyer to exaggerate income levels, falsify pay stubs, or create fake employment records to secure a larger loan.

Red Flags to Watch:

• A lender encourages you to inflate your income.
• You’re asked to sign a blank or incomplete loan application.
• A lender uses a fake employment verification letter.

How to Protect Yourself:

• Always provide accurate income and employment details.
• Double-check any documents a broker submits on your behalf.
• If a lender pushes you to exaggerate, walk away immediately to avoid liability.

2. Unusual Payment Requests or Third-Party Transfers

If you’re asked to send money to a third party or make payments outside of normal escrow channels, be cautious. Fraudsters often use wire transfer scams or fake escrow accounts to steal funds.

Once money is wired to a fraudulent account, it’s often unrecoverable. Legitimate transactions should go through verified escrow services.

Red Flags to Watch:

• Requests to wire money to unfamiliar accounts.
• Last-minute changes to payment instructions.
• Emails or calls with urgent payment demands.

How to Protect Yourself:

• Always verify payment instructions with your lender or escrow officer.
• Confirm account details by phone using known contact numbers.
• Be wary of phishing emails or fake domains.

3. Inflated or Fake Appraisals

An appraiser’s role is to provide an estimate of a property’s market value. In fraudulent schemes, appraisers may inflate values to trick lenders into approving larger loans than the property is worth. Or, the property may be purposely undervalued to justify a quick sale.

Red Flags to Watch:

• The appraisal value is much higher or lower than similar homes nearby.
• The appraisal report lacks details or comparable property listings.
• A seller or lender insists on using a specific appraiser you didn’t choose.

How to Protect Yourself:

• Request a copy of the appraisal report.

• Compare it with recent comparable sales (comps).
• Use a trusted lender who works with reputable appraisers.

4. Identity Theft & Credit Report Errors

Mortgage fraud can also occur when someone else uses your identity to apply for a loan. If you notice errors on your credit report or receive loan documents you didn’t apply for, act immediately.

Identity theft can damage your credit and lead to legal complications. Fraudulent loans in your name can result in foreclosure or financial loss.

Red Flags to Watch:

• Missing or inconsistent information in loan documents.
• Requests to sign paperwork without reviewing it fully.
• Multiple versions of the same document with slight discrepancies.

How to Protect Yourself:

• Always keep copies of your documents.
• Monitor your credit report and look for errors.
• Never sign blank or rushed paperwork.

5. Too-Good-To-Be-True Loan Offers

If a mortgage deal sounds too good to be true, it probably is. Some predatory lenders offer loans with unrealistically low interest rates or little to no documentation requirements. These deals often come with hidden fees or terms that make it nearly impossible to repay.

Red Flags to Watch:

• No verification required for income, assets, or employment.
• Promises of guaranteed approval regardless of credit history.
• High-pressure sales tactics to sign immediately.

How to Protect Yourself:

• Work only with licensed and reputable mortgage lenders.
• Compare offers from multiple sources.
• Read all terms carefully—especially small print regarding fees and penalties.

Potential Consequences of Falling for Mortgage Fraud

Mortgage fraud can ruin a buyer’s financial future. Even if you unknowingly participate, you may still be held responsible. Consequences can include the following:

How to Protect Yourself From Mortgage Fraud

To protect yourself from the myriad of mortgage fraud scams out there, consider adopting the following:

1. Verify Professionals: Check if your broker, lender, or appraiser is licensed through government databases.
2. Do Independent Research: Compare market prices, loan rates, and neighborhood data before committing.
3. Read Everything Carefully: Never sign incomplete or rushed documents.
4. Watch for Pressure Tactics: Fraudsters push urgency to limit your ability to investigate.
5. Get Legal Advice: A real estate attorney can review contracts for hidden risks.

FAQs

• Is mortgage fraud a crime?

Yes, mortgage fraud is a federal crime, with penalties ranging from fines to prison time.

• Can a borrower accidentally commit mortgage fraud?

Yes—if you misstate income or assets, even at your lender’s suggestion, you can be held liable.

• How do I report suspected mortgage fraud?

You can report mortgage fraud to the FBI or HUD OIG.

• What should I do if I suspect fraud in my transaction?

Pause the process, seek legal advice, and report concerns to regulators before signing anything.

• What is appraisal fraud?

Appraisal fraud is when a property’s value is falsely inflated or deflated to manipulate loan approval or sale price.

• What is income fraud?

Income fraud occurs when borrowers exaggerate or fabricate income to qualify for a larger loan.

• Can falsifying employment be considered fraud?

Yes — listing a fake employer or job title is a form of mortgage fraud.

• Can mortgage fraud affect my credit score?

Yes — especially if fraud leads to missed payments, foreclosure, or identity theft.

Final Thoughts

Mortgage fraud is more common than many homebuyers realize—and it can have life-changing consequences. By knowing the warning signs, you can make smarter, safer decisions when buying a home. If something feels off, trust your instincts and seek independent advice before moving forward.

Need Financing?

Are you ready to buy a home and need financing? We can help. Sammamish Mortgage is a local mortgage company from Bellevue, Washington serving the entire state, as well as Oregon, Idaho, Colorado, and California. We offer many mortgage programs to buyers all over the Pacific Northwest and have been doing so since 1992. Contact us today with any questions you have about mortgages, or visit our website to get an instant rate quote.