Mortgage fraud is a crime that affects both lenders and borrowers. It can negatively affect credit scores, raise insurance premiums, increase document requirements, waste time and money and cause stress for honest borrowers looking for financing. There are a few actions you can take to protect yourself from becoming a victim of mortgage fraud; the most effective is prevention through education. This week I want to cover a few scenarios that could lead to trouble if you are not properly informed.
Can I buy a house for someone else to live in?
The answer is yes, though it must be clear to the lender exactly what your intentions are to do with that property when you are purchasing it. If a family member or a relative is going to live in the property and you are going to cover all of the costs, this is considered to be a second home and minimal downpayment is required. An example of this scenario may be when your child is attending school in a different city, or you may work out of town during the week and would like to own a property versus rent while away. If you are buying a property as an investment and you intend to rent it out to a tenant with an accompanying lease agreement, than it’s a rental property and a minimum of 20% downpayment is required. When the situation becomes questionable is if you’re obtaining a mortgage on a property that you don’t plan on having anything to do with. This is considered ‘straw buying’ and it’s bad news. There is no reason a mortgage borrower should be in the dark about any part of their house buying transaction, ask questions until comfortable and be cautious if you are not getting sufficient answers. Keep reading for steps to take if you suspect a scam.
Can I borrow the downpayment?
There are really only a few scenarios where borrowing the downpayment is acceptable to lenders. The first example would be if you are applying for a mortgage to purchase a home under the “flex down” program offered by a number of lenders. This is where you would take a loan out for the downpayment that is separate from the mortgage. You could also use a line of credit or even a credit card though do be advised the payment for that new debt would have to be included when qualifying for your new mortgage.
The other possibility is through a vendor take-back mortgage, also known as seller financing. This is where the seller of the property will “lend” you a portion or all of the required downpayment. This private loan must be fully documented with a signed agreement witnessed by a lawyer. Again, the payment for this additional debt must also be included in meeting the qualifying requirements with the lender. While this 2nd option is not likely to be accepted by a “prime” lender, if the terms of the loan are disclosed at time of application, there are some alternative lenders that may be agreeable to the situation. If you are thinking of this option, do discuss the pros and cons of such an arrangement with an experienced mortgage professional before you commit.
Can I correct an error on my documents?
No. On a third party document such as an income and employment letter, paystub, bank statement, T4, or other any other supporting document, altering it in any way is a negative in the lenders eyes. If there is an inaccuracy on a document that is preventing you from obtaining a mortgage approval, it needs to be corrected by the third party and not the borrower.
If it sounds too good to be true, it probably is
So cliché, I know, but it’s a good motto when it comes to preventing mortgage fraud. Most lenders ask for supporting documents upfront, they review, ask questions and perhaps ask for further documentation. If you are applying for financing and not hearing back from the lender, something could be up. All lenders need to verify the source of the funds being used for downpayment and if you are not being asked for documents relating to that money, or an individual who may be helping you has offered to ‘take care’ of those documents, start directing questions to the lender yourself.
The moral of the story is getting a mortgage isn’t just signing on the dotted line, there is more to it. Don’t let an easy transaction fool you, do your research and protect yourself.
Properties with no mortgage
A property with a lot of equity is an appealing target for individuals looking to commit property related crime. The idea behind a free and clear property title is; the criminal will obtain fake identification documents and will pretend to be the owner of the property and then will apply for mortgage financing on said property. The criminals take those mortgage funds, never make payments and the honest owners of the home don’t find out about the fraud until way after the mortgage is in arrears. This leaves the victims exposed to legal action from a lender they never even met and causes lenders to spend more time and money on fraud prevention procedures. This can also lead to tightening of lending guidelines and additional document requirements for future potential borrowers. My suggestion is to request a copy of your land title on a regular basis to ensure no one has registered anything against your title without your knowledge. You can get a copy of your title by providing your legal description at any Central Registry office.
I suspect someone I’m working with is committing fraud
If you’re located in Alberta, the Real Estate Council of Alberta (RECA) has some great Consumer Relationship Guides that detail regulatory requirements. These may help you determine if there is something criminal occurring in relation to your real estate transaction. Depending on who’s linked to the deceit, your next call could be the mortgage lender involved, local law enforcement, a lawyer, or the Canadian Anti-Fraud Centre. Contact a financial professional you trust for guidance if you’re unsure of what to do next.
As a consumer, there are vital steps you can take to prevent yourself from becoming a victim of fraud and there are numerous resources available to you for more information. Education is the most effective tool for fraud prevention. The second most important indicator is your gut, don’t be afraid to get a second opinion if something feels off.