Mortgage Fraud Risk Jumped 9% This Quarter. Sellers Need to Know Why.

Mortgage application fraud risk climbed 9.1% in the second quarter of 2026, according to Cotality's National Mortgage Application Fraud Risk Index released Thursday. The index hit a reading of 132, meaning roughly one in every 119 mortgage applications now shows signs of fraud risk. That's a significant quarterly jump — even though the figure remains about 4.6% below where it stood a year ago.

The driver isn't mysterious. Elevated mortgage rates have kept refinance activity quiet, which means a larger share of all mortgage activity is now coming from purchase loans. In Q2, purchase loans made up 72% of all applications, up sharply from 59% the prior quarter. That shift matters because purchase loans carry meaningfully more fraud risk than refinances — and when the mix tilts toward purchases, the overall fraud index follows.

Why Purchase Loans Carry More Fraud Risk Than Refinances

The mechanics here are straightforward. Many government refinance programs are streamlined — they require less documentation on income, assets, and property value. Less paperwork means fewer places to misrepresent information. Purchase loans work in reverse: they typically require full income verification, asset documentation, and appraisals. That documentation trail creates more decision points, and more decision points create more opportunity for someone to submit false or misleading information.

Matt Seguin, senior principal of mortgage fraud solutions at Cotality, noted in the report that the rate cuts many market participants expected simply didn't arrive. That kept the refinance pipeline thin and pushed demand toward purchases — exactly the kind of loan environment where fraud risk concentrates.

Among the specific fraud types rising in Q2, undisclosed real estate showed the largest year-over-year increase, up 2.6%. This category covers situations where a borrower hides existing property ownership to conceal additional debt, misrepresent their intended occupancy of a home, or obscure a prior foreclosure, default, or short sale. Investment property applications accounted for a significant portion of this uptick — undisclosed real estate alerts occur roughly 2.5 times more often on investment properties than on owner-occupied homes.

Investment Properties and Multifamily Loans Are the Riskiest Corners of the Market

If you're selling a property that's likely to attract investor buyers or that qualifies as multifamily, the fraud risk picture is considerably more concentrated. Cotality found that one in every 44 investment property applications showed fraud risk indicators in Q2 — compared to the overall industry average of one in 119. Multifamily applications were even more exposed, with one in 27 flagging risk signals.

Investment and multifamily loans represented 12% of total mortgage applications during the quarter. Cotality noted these loan categories have historically carried fraud risk levels at least three times higher than the average mortgage application. Transaction-related alerts also rose for buyers purchasing homes in states where they hadn't previously lived, and for properties priced well below what the buyer had previously owned — both patterns that can indicate intent to misrepresent occupancy or purchasing purpose.

Occupancy fraud was another notable category: applications where borrowers claimed first-time homebuyer status despite evidence of existing property ownership, or claimed owner-occupancy while already owning higher-value homes nearby.

What a Higher-Fraud Environment Actually Means If You're Selling

For sellers, fraud risk in the mortgage market isn't an abstract number — it's a closing risk. When a buyer's application contains misrepresentations that a lender's fraud detection system flags, the loan can be delayed, restructured, or denied outright. That means a deal that looked solid in contract can unravel at the underwriting stage, often weeks in, after you've already taken your home off the market.

Here's what sellers should be thinking about right now:

• Buyer qualification matters more than ever. A pre-approval letter is not enough. Ask your agent whether the buyer's lender has actually reviewed documentation or simply run a soft credit check. Full underwriting pre-approval is substantially more reliable, especially in a high-fraud-risk environment.
• Investment property offers carry elevated closing risk. If you're fielding offers from buyers indicating the property will be used as a rental or investment, be aware that their loan applications statistically face far greater scrutiny and fraud-flag rates. Cash offers from investors sidestep this entirely.
• Watch for occupancy red flags in the offer itself. If a buyer is purchasing a home significantly below what they currently own, or is moving from out of state in unusual circumstances, those are the exact borrower profiles Cotality's index flagged as higher-risk this quarter.
• Multifamily sellers face a compressed buyer pool. With one in 27 multifamily applications flagging fraud indicators, underwriting denials in this segment are disproportionately common. Price appropriately for a pool that may skew more toward all-cash or portfolio buyers.

Overall mortgage application volume rose 5.2% from Q1 to Q2, and government loans edged up to 24% of total applications. That volume growth is genuinely good news for sellers — more buyers in the market generally improves your negotiating position and reduces days on market. But volume and quality aren't the same thing. A busier market with elevated fraud risk means more buyers starting the purchase process, and a higher share of those buyers hitting friction on the lending side before they close.

Cotality plans to release its full annual Mortgage Fraud Report in September, which will likely provide additional breakdowns by geography and loan type. Sellers with listings that sit in high-risk segments — investor-targeted properties, multifamily, or markets with elevated foreclosure activity — should keep that report on their radar.

If you're weighing whether to list now or wait, understanding who can actually close on your property is as important as understanding what it's worth. An instant-offer tool can help you compare a certain, documented offer against the uncertainty of navigating a purchase market where loan quality is uneven.