Appraisal Fraud

Reviewed by Bhavana | Updated on Aug 27, 2020

Introduction to Appraisal Fraud

Appraisal fraud is a kind of mortgage fraud which deliberately assesses the value of a home at an inflated price, which is more than its fair market value (FMV). Appraisal fraud can happen when an appraiser is on the scam, and the property's value is dishonestly overstated. It may also occur when the homeowner, seller, or buyer physically alters a "honest" assessment using methods, such as digital editing or bribery.

How Does an Appraisal Fraud Function?

Appraisal fraud is one of the most common forms of mortgage fraud that occurs when the property's value is falsely inflated (or deflated) by an appraiser (or buyer or seller) so that it diverges substantially from the fair market value.

The overstated value gained by appraisal fraud is generally used to:

  • Assist a seller get a better price than the market would have warranted otherwise

  • Assist a buyer get financing, as the mortgage amount could be much lower than the home's estimated value

  • Assist a homeowner in obtaining the desired refinancing or house equity loan

More About Appraisal Fraud

Before a real estate transaction happens, if it includes a mortgage loan, in particular, a qualified property appraiser may determine the value of the land. In general, the appraiser walks carefully through the property, inspecting the interior and exterior spaces to arrive at the fair market value (or range of values) for which a property should reasonably be selling in the market.

In case the appraisal is too high or too low in comparison to the selling price agreed upon, a lender or a bank may renege on the credit. Assessment of property value is also used for tax purposes to estimate the amount of property taxes the owner is required to pay.

To safeguard themselves from this misdeed, banks often use a preferred appraiser to set up the appraisal themselves when underwriting a mortgage or refinancing a loan. In the case of an over-excessive valuation, the lender could ask the seller to lower the home price or refuse to lend if they believe the home price is excessive.

Now, a buyer can still choose to pay the inflated appraisal price, but a lender won't use that price for their loan purposes, meaning that the buyer will have to pay the difference in the appraisal of the lender and the asking price.