For most people, securing a home loan is by far the most significant financial debt they will ever undertake. The information provided to potential lenders impacts not only your loan amount but also your interest rate and possibly whether or not you’ll get the loan. It is vital that you provide completely accurate information; it is never a wise move to ‘fudge or embellish the facts’. Lying on a mortgage application, even ‘little white lies’, are considered mortgage fraud and can entail serious consequences. Lenders can and do vet all information and if falsehoods are revealed, being denied a mortgage is the lesser of the evils.
What are lenders on the lookout for?
Who will live in the home
Lenders charge lower interest rates for primary residences because its been proven the people are more apt to make timely payments for mortgages that secure their family’s house VS that of an investment property. Down payments on investment properties also tend to be smaller. Both of these reasons equate to greater risk for lenders, making them a bit more wary. But that hasn’t stopped potential investment buyers from claiming they will live in the home when they really intend otherwise.
Some red flags include buying a house in an area that doesn’t jibe with your socio-economic status or having your mortgage bills sent to a different address than your ‘new’ residence.
Your household income
This is a difficult one to fake because your lender will verify all financial information through a multitude of sources: tax returns, W-2s, 1099s, bank statements, etc. If your income claims fall short when crosschecked, odds are, they won’t feel comfortable approving your loan.
Whether you work for a company or are self-employed, your tax returns reveal it all. Lenders will ask you for a copy AND also get your previous two returns directly from the IRS. The bottom line here is, don’t fudge your financial situation.
The magic number of years of employment in the same field for lenders is two. Borrowers may feel the need to bump up this number if they fall below the 24-month mark, or may invent a small business venture or talk someone into claiming they work for them to help boost employment status. Again, your tax returns will tell all, so it’s best to stick with the facts.
A co-borrower is usually enlisted by the person purchasing the home when they don’t earn enough to qualify for a mortgage on their own financial merits. Although their intention is good, people who sign on as co-borrowers can be negatively impacted as they are listed as financially obligated to that loan, which affects their debt to income ratio. Think twice about asking someone to be a co-borrower or just putting down a name; your lender will check up.
Where your down payment came from
It is common for family to help with down payments, especially for first time homebuyers and many don’t consider it misleading to not disclose the origin of the funds. But, if the money is to be repaid, that is considered debt and must be noted as such. If the funds are a gift, with no repayment required, it is important to provide your lender with a letter from the person that provided the gift expressly stating that they don’t expect or wish to be reimbursed.
Unidentified rebates or seller incentives
There are many ways sellers sweeten the pot for buyers. This can be covering closing costs – a common ‘rebate’ – or even providing the buyer’s down payment. First and foremost, consult with the experts on your team to ensure any incentives offered are indeed allowable. Then, be sure to inform your lender of all seller incentives you receive. If these deals take place outside the mortgage loan loop, that could be considered fraud.
Your debt to income ratio is a huge determining factor to securing a mortgage. Failing to list all of your liabilities with the intent of making your income look more robust than it is or securing other lines of credit or loans prior to obtaining a home loan are both big no-nos. Your lender will check your credit report and instantly see the real situation.
While lenders check into your specifics during the loan process, should any information come to the surface after you’ve been granted the mortgage, your interest rate could be raised or you could be required to repay the loan in full immediately if there is something egregious is uncovered. The most serious consequences of mortgage fraud can be severe, with $1 million in fines and up to 30 years in prison. Though small exclusions or overstatements generally won’t engender that strict of a sentence, it is imperative to provide accurate data and avoid any falsehoods and omissions of crucial information. When you sign off on your mortgage, you sign a statement that says all of the information is accurate to the best of your knowledge. If you fail to divulge key details, take out another loan or receive any seller incentives without letting your lender know, those are all considered mortgage fraud.