These days, buying a home is getting harder and harder for the average person. Due to the growing barriers to homeownership, some people have had to get creative to make their purchases more viable. For some, this means getting a gift for a down payment, maybe renting out a portion of their home to offset carrying costs, or taking part in a rent-to-own agreement. Across the board, there are many ways that Canadians can make their mortgages more accessible.
However, there is another way that you can help yourself get a mortgage – a way that is highly inadvisable, and yet, not totally unheard of. After all, you know what you can and can't afford, right? How much can it hurt the bank, who has billions of dollars, if you fudge a few numbers on your mortgage application? How much trouble can you really get into?
The truth is: a lot.
Overall, we would have to highly advise against committing mortgage fraud for obvious reasons, but just to really drive the point home, let's take a look at how mortgage fraud works in Canada, how common it is, and how much trouble you’ll be in when you get caught.
What does mortgage fraud look like?
Mortgage fraud can take many different forms. Both a home buyer and anyone they work with, such as a mortgage broker, can be responsible for committing mortgage fraud. This means that even if you are an honest homebuyer, it’s important that you work with honest professionals to make sure you are not the victim of fraud yourself.
The Financial Services Commission of Ontario lists multiple practices that can constitute mortgage fraud. Some of these include fabricating or altering paperwork to mislead or otherwise misrepresent, the facts of your financial state, lack of communication or disclosures from mortgage professionals to their clients, verbal agreements and cash fees, and more.
Common ways that people lie on their mortgage applications are misrepresenting their job status (employed, self-employed, hourly or salaried, etc.), falsifying pay stubs, or lying about the purpose of a property such as claiming a rental property is a primary residence.
When it comes to applying for a mortgage, you must represent all of the facts of your financial status as accurately as possible. In fact, you are required to sign your documents certifying that you have completed them to the best of your ability. Any deviation from the truth, no matter how minor or inconsequential it may seem, counts as mortgage fraud and can come with consequences.
Another kind of mortgage fraud scheme that exists is known as “straw buyers”. Just like a straw man out in the field, a straw buyer is a fake buyer used to trick your mortgage lender and obtain mortgage financing. How it works is someone who wants a mortgage but has poor financial health or credit history will get someone with better financials to put their name on the mortgage papers. The straw buyer may be offered some form of kickback by agreeing to sign the papers. However, even if you sign a mortgage for someone else, your name is still on the paper and you are still responsible for the mortgage in the end. If the bank does not trust this person as a borrower, why should you?
As a homebuyer, it’s important to protect yourself against fraud and there are a number of ways you can do this. For one, make sure to work with certified mortgage professionals and be wary of any who have had enforcements against them by a regulatory body. In most provinces, there are publicly available records of such enforcements for consumer protection purposes. If you suspect you have been the victim of mortgage fraud, you should seek independent legal advice immediately.
You should also make sure all your mortgage documents are looked over by a non-biased real estate or mortgage lawyer to make sure everything is in order. Finally, do your due diligence to proofread all your submitted documents – even an accidental error can be considered fraud and come with consequences. And, even if your real estate agent or mortgage broker filled out your paperwork, you will be responsible for the information that is submitted.
What are the consequences?
First of all, our mortgage system is designed with checks and balances to ensure that those who are taking out loans can actually afford their mortgage payments. This is for the benefit of both the borrower and the lender. If you think lying on a mortgage is a good way to get a home you otherwise wouldn’t get, you’re setting yourself up for serious financial repercussions that can change your life, even if your lie is never caught.
If you are caught, there can be various consequences. Remember, fraud is a criminal offence and can have serious legal consequences such as criminal charges.
If you commit fraud and it’s noticed before the closing date, your lender may cancel on the mortgage, leaving you on the hook to find other financing, losing your deposit, or even being sued for failing to finalize the purchase. Finding financing somewhere else may prove difficult as mortgage fraud can have a serious impact on your credit score and will essentially mean you will have great difficulty getting loans in the future.
If your fraud is discovered after closing, your lender may be able to "call in'' your mortgage, requiring you to pay the full amount upfront or face foreclosure.
Though the criminal consequences of mortgage fraud will vary on a case-by-case basis, there have been cases of people who have received actual prison sentences for mortgage fraud.
For real estate professionals who commit mortgage fraud, there can also be severe career consequences. Most jobs in real estate require certification by a regulatory body. These groups provide members with standard practices as well as codes of ethics in order to protect consumers. Should a professional be found to commit mortgage fraud, not only can they lose their certification and their job, but they may also be fined a hefty fee by their regulatory body, or be liable to the home buyers for damages which can amount to a lot of money. And, like anyone else, they will be criminally responsible for the mortgage fraud they committed.
How is mortgage fraud detected?
Lenders are aware of the fact that fraud happens, so to protect their interests, they employ anti-fraud experts whose job is to monitor the bank and their clients’ documents and accounts for suspicious behaviour. This can be done both by manually checking documents, as well as by more advanced methods using computers to automatically detect fraud. If something is flagged for potential fraud, the bank will quickly investigate and determine whether further action needs to be taken.
The Canada Mortgage and Housing Corporation itself also employs its own fraud team, representing the second line of defence against mortgage fraud in Canada.
Overall, though mortgage fraud occurs all the time, it’s not currently a major issue in Canada, though it is a very real possibility. Not only are anti-fraud measures very robust in our present system, but they are constantly being improved to make fraud even more difficult to get away with.
Other kinds of real estate fraud
There are other kinds of fraud that may take place in real estate beyond mortgage fraud.
Tax fraud is the result of a property owner attempting to misrepresent their tax information, usually to pay less than they should. This may be done in the cases of vacancy taxes, or for investors looking to avoid capital gains tax on properties being sold. Like mortgage lenders, the Canada Revenue Agency has its own robust anti-fraud systems to prevent these kinds of fraudulent claims.
There are also numerous different kinds of scams, such as rental scams where a supposed landlord takes money from a tenant only for the tenant to discover there was no property being rented. Though these scams are not as heavily monitored, they are still fraud and should be reported to the authorities.
Anyone who takes part in a real estate transaction can commit or be a victim of fraud. If anything seems out of place in your real estate purchase, be sure to contact the relevant legal advice as soon as possible to protect yourself and avoid even greater damage.
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