Mortgage “fudge the facts” untruths

Mortgage “fudge the facts” untruths

These are the most common mortgage “fudge the facts” untruths that can come back and bite you in the butt……

Let’s set the start with the obvious facts. Buying a house involves getting a mortgage . This will normally involve a lot of money, a lot of time, a lot of paperwork and a lot of stress.  Information provided on the mortgage application has a direct impact on your loan amount.  So it’s not shocking that some people may be tempted to fudge the facts just a bit. What is the big deal, as long as it is close to the truth, what can possibly happen?

Well the truth to be known is a lot. In fact, it can make the process out-and-out agonizing.

To begin with, the phrase “fudging the facts” is a bit of a misleading term as far as mortgage applications are concerned. If you’re fudging the facts in a way that affects your costs or ability to get the loan, that small untruth is likely to turn into a monster. Lenders are super sleuths and your chances of getting away with inaccurate information aren’t very good.

What are the possible consequences? Getting rejected for the mortgage is the least of them. If your inaccurate accounting is discovered after you get the loan, your lender could raise your interest rate or even demand immediate repayment in full. Tax-related misrepresentations could get you in trouble with the IRS.

There are penalties for mortgage fraud, which is what lying on a mortgage application is called. It ranges from prison time and/or a gigantic fine. You most likely will not receive a penalty for a small exaggeration or blunder, but you could still end up with some kind of unpleasant consequence.

These following “untruths” might seem on the surface harmless but could get you into deep doodoo once the truth is uncovered.

  1. Who will reside in the home?

This is the first question that sets the direction of the application. Why? When you apply for a mortgage to buy a home as you primary residence the interest rate and down payment are lower. If you actually plan to rent it out as an investment property, to be legit, you need to live in the home 2 out any 5 year period to escape IRS tax penalties and mortgage fraud. Now you might think, “What difference does it make? A loan is a loan. I’m responsible for it either way.” But lenders know that the default rates are higher on investment properties than they are on primary residences. People try harder to keep up the payments when the roof over their head is on the line.

From the lender’s standpoint, you’re thieving money from them by making them take on more risk than they agreed to. To be sure, risk costs money.

Don’t think for a minute you have pulled a fast one on the lender. There are numerous red flags that can tip them off. Buying a home in a neighborhood that doesn’t fit your lifestyle is one. If you drive a Beemer and buy in a depressed neighborhood, well odds are you are not living there. Another tipoff is your mortgage statements are being sent to a different address than your new “primary residence.” Either might cause your lender to send someone to investigate.

How much money you earn.

It’s about impossible to overstate your income on a mortgage application. Your lender is going to comb through every line on your tax return, bank statements, paystubs and any other financial information you provide on your application. So if your tax returns, bank statements, W-2 forms etc don’t match the application, and you can’t back the information, you won’t get the loan.

Tax returns are a big one. Your lender is going to request copies of your two most recent ones, they will require you to sign a T4605 form giving them permission to get a copy of your tax return straight form the IRS. You can’t simply modify your own copies and try to submit them. If you do, your lender is going to wonder why your copy and the one from the IRS don’t match.

People who are self-employed sometimes feel they have a bit more room to fudge things, since they’re reporting their own income. But again, your tax return is going to tell the tale. You might exaggerate your earnings on the profit-and-loss statements from your business, but unless those also match up with your tax returns, you’re going to have a hard time getting your lender to buy those figures.

  1. Sourcing of your down payment monies.

Here’s one that many borrowers think is no big deal: You have miscalculated your needed down payment. A family member fronts you the necessary funds with the understanding you will pay them back later. What’s wrong with that?

The problem is that you need to disclose all your liabilities on the application. You are only allowed so much debt in your monthly payments and mortgage with your gross monthly income. Rule of thumb, your mortgage can be no more than 33% of your gross monthly income. Your debt can not exceed about 24% of your gross monthly income.  BUT don’t be discouraged. If it is truly a “gift” your lender will guide you through the proper etiquette of writing the “funds are a gift” letter.

  1. Undisclosed incentives/returns.

In some real estate transactions, conniving borrowers and lenders will try to “sweeten the pot” by making a side deal on sale price of the home. The buyer really wants the house but is unwilling to pay the price. He can afford the payment and easily get the loan.  The seller really needs the home sold for whatever reason. The seller can offer the buyer a rebate after close of escrow, to cover some of the extra cost of buying the home. The seller might offer to cover the buyer’s closing costs above and beyond what is legally acceptable. The seller might even cover the buyer’s down payment. What makes them dishonest is the lender is out of the circle.

The problem is that the lender is being deceived into financing more than the actual sale price or cost to purchase the home. More unknown risk.

  1. A fake co-borrower.

A borrower who doesn’t meet the requirements for the loan will turn to a co-borrower. The co-borrower, deceitfully states that he or she will live in the home and will pay towards the mortgage payment. The  co-borrower’s income is counted toward qualifying for the mortgage. Truth be known if the co-borrower is not paying towards the loan and the borrower gets into financial difficulties, guess who is also going down along with the borrower? The mortgage is now part of the co-borrowers debt and reported to the credit agencies. Darn, now you can’t buy that new car because you can’t afford it because your debt to income ratio is too high.

  1. Your employment status.

People are tempted to stretch the truth when it comes to reporting their employment on a mortgage application. An example is claiming you’ve been employed by a company for 3 years when you’ve only been the 1 ½ years. What’s the harm in that? Lenders want to see at least two years of steady employment before approving a mortgage. You can change jobs as long as it is in the same field of work. It is almost impossible to lie about employment these days. The lender will have to have an employment verification from your employer as part of the condition to provide a loan. No verification no loan. Your tax return has to also support your employment statement on the loan application.

  1. Hidden liabilities

The most important key to getting approved for a loan is your debt-to-income ratio. This is how much you have to pay out each month to cover all your debt from you income. Borrowers will overlook listing certain debts on their mortgage application to try to make it look like they owe less than they do. Don’t try to take a large cash advance on a credit card to pay down some debt to look good and hope it doesn’t show up on the credit report. The lenders are savvy to this. Let me tell you why this will not work… bank statements, IRS returns and credit reports done at the beginning and ending of the process. This will not work, hurry refer back to #2 in this article.  Rule of thumb…loan officers are loan detectives….they can smell a lie faster than a fresh pot of coffee!

Before applying for a Mortgage, do your diligence, do your homework, know your credit and most important of all work closely with the loan officer. They really do want you to succeed.

This article was written by Diana Harris 

 

DIANA HARRIS BROKER THE HARRIS GROUP
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Diana Harris

Diana Harris

Diana Harris is the Broker for The Harris Group. She obtained her real estate license in 2005 and then broker license in 2012. She practices in the Inland Empire area of Southern California.