Closing and Contract Fraud Schemes

Written By: Jane Harford

In our fifth and final chapter of how to wage and win a war on mortgage fraud, we will cover the review of a sales contract, what to look for and how to recognize any issues that may take place on the HUD1, closing papers and other documents. Reviewing these forms prior to closing and funding a loan will ensure a smooth and legally conducted closing transaction.

The sales contract and its details are often a huge key to whether or not the entire transaction will be a fully legal transaction. If there are red flags not identified here, the likelihood of this situation being fraudulent in some capacity greatly increases. From the beginning, these items should be carefully reviewed to determine if there are any questions that require further research or investigation.

-Is the contract legible? Can all pages and addendums be read easily? Are all pages of the contract provided? Are all signatures on the pages easily readable and consistent? Do all parties to transaction make sense? The full contract of sale, with all addendums signed & dated by all parties should be legible, readable and signed/dated consistently.

-Are all purchasers listed on the contract involved in the loan? Are all names from the contract on the 1003 as a loan applicant? Are the names listed correctly on both documents consistently? Are there any parties on the contract that don’t appear on the loan-if so, why?

-Does the property address shown on the contract remain consistent on the appraisal request, appraisal report, title work and HUD 1? If they are different - why?

-Do the names of seller remain consistent from the contract to the appraisal report to the title commitment to the HUD 1? If not-what are differences?
-Does the current seller occupy the property or is the property vacant or occupied by a tenant? Does the contract confirm this? Does the appraisal state the same thing? Is that consistent with the information for the loan application?

-Does the contract provide for any giveaways by the seller? Do these include such items as-vacations, plasma TV’s or mortgage payments paid by seller? Does this include large allowances for landscaping, decorating or renovation?

-Check the details of what seller is paying for real estate commission? Does the amount for commission, finder fees and any realtor bonus exceed the norm for this area? (8% would be considered to be excessive).

-Does the sales contract include any reference for bonuses paid to realtor or purchaser? Also, are there contracts missing that may include this information? There are times when addendums regarding this type of “bonus” paid may be on an addendum that is missing from contract provided to the lender/title company? Does the list of addendums on the contract show an addendum that is missing from the contract provided for review?

-Do the parties to deal seem to have any type of non arms length relationship? This might indicate a straw buyer, someone buying a relative’s property to bail out on a short sale or foreclosure? If this seems suspicious, it probably is.

Be cautious regarding this contract of sale. All parties that assist in the processing of the mortgage loan must review the contract for any potential issues that could indicate fraud, potential excessive fees or allowances paid or illegal transfer of the property or a property flip/flop.
If the transaction/loan application indicates no issues that require further research, the next step should be to prepare and conduct the closing. The lender’s closing department and the title company work hand in hand to complete a smooth closing, funding and recording of a mortgage loan.

Here are some issues/potential red flags that could be found in the review of details of closing papers, including the title commitment, HUD 1 and other documents. The following items should be carefully reviewed while completing the documents for closing of a loan.

-Do the names of all parties to the transaction match what was on the contract of sale, appraisal? Is the property address and legal description correct?

-Is there a reference to sellers not documented or mentioned on the contract?

-Is the lender name, loan #, address and all other information consistent?

-Do all parties appear to be acting in a manner that would not indicate any non arms length transaction? (No similar names, no red flag to indicate that this is a foreclosure or short sale bailout).

-Does the sales price remain consistent throughout all documents reviewed?

-Does any EMD paid, cleared and documented by lender remain constant and appear on page #1 of the HUD1?

-Are there any references for undisclosed second liens, additional escrows or large credits from seller to unknown third parties (seller’s side of HUD1).

-Does the buyer’s bottom line indicate that he does not need to pay any money at closing or that he is due to get cash back on a purchase?

-Does the HUD1 show any debts, liens, judgments, delinquent loans not previously disclosed by title commitment/policy? Are there any other red flags that would indicate that the title commitment/policy would not insure property, transaction for lender, and owner?

-Review of the title commitment/policy-does this provides commitment #, issued by an approved title insurance company? Is the commitment signed/dated by an authorized agent for the title underwriter? Does the title commitment provide for all schedules as required by sales type, loan type and property type? If not, has this been corrected or updated from the title insurer?

-Do the liens that appear on the title commitment appear in the land record that have been researched and provided to title company? Are any liens recently added, not recorded or delinquent-but no legal action taken?

-Is the title company one that is on an approved list for the lender? Is this branch of company part of a larger company or a local firm? Is there an established relationship between closing department and title agenct, settlement officer and back office staff for each company? Have any problems arisen in the past that might have the lender believe that anything on this transaction would be different than previous transactions?

-What is the title company’s track record with the lender? Have they been willing? to correct issues in the past? Does the title company conduct it’s own QC checks on title insurance companies, county recording offices for recordation of the proper loan documents/mortgages and obtaining correct property tax bill information?

These are just some of the many questions that we as the lender’s eyes and ears should be reviewing on each transaction prepared and closed. If ANY RED FLAGS occur, the preparation of the final documents should be halted until then answers are completed in a satisfactory manner or until the investigation is completed and it is determined that no illegal activity, fraudulent intent or straw buyer/bailout scheme are taking place. This will take the research staff of the lender, title of the company, title insurer and outside parties to ensure that all information is consistent, accurate and legal.

As you can see, it takes a village to close a mortgage loan. When done correctly, lots of hands do get into the pie. Thus, the greater emphasis on conducting good research on any thing that appears unusual or “funky”. It is a vigilant effort of on the part of the lenders, title companies, and title insurance companies to ensure that we only close legal and accurate loans.

In the meantime, underwrite and close fraud free loans!

About The Author

Jane Harford - As an NAMP® staff writer, Jane brings 30+ years of mortgage business experience in FHA, VA, LAPP and is also an FHA DE Underwriter. If you would like to become a writer for NAMP® , please email us at:


Opinion-Editorial (Op-Ed) Disclaimer For NAMP® Library Articles: The views and opinions expressed in the NAMP® Library articles are those of the authors and do not necessarily reflect any official NAMP® policy or position. Examples of analysis performed within this article are only examples. They should not be utilized in real-world application as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of NAMP®. Nothing contained in this article should be considered legal advice.