Avoid problems with your mortgage application: Tips for applicants
Dear Clients and Friends,
There are all sorts of stories out there about predatory lenders being sued for fraud against homebuyers. On the other side of the coin, however, a study by CoreLogic found that fraud by mortgage applicants is also rising.
According to the study, approximately 0.92 percent of all mortgage applications during the second quarter of 2018 included fraudulent elements, more than in the second quarter of 2017, when an estimated 0.82 percent of applications did.
Even a small statement on your application that simply isn’t true could land you in big legal trouble. The federal crime of mortgage fraud brings with it a possible punishment of up to 30 years in prison, a fine of up to $1 million or a combination of the two.
The good news is you can easily avoid mortgage fraud. Here are five ways to protect yourself:
Don’t keep secret any deal you make with the seller.
In some cases, when the list price of a home is higher than the buyer wants to pay, sellers find ways to make a deal on the side. Possible incentives include paying some portion of the down payment, closing costs or repairs needed.
These deals are sometimes allowed, but the lender must be informed about them. When the lender isn’t told, the applicant could be accused of mortgage fraud. That’s because the deal essentially would put the lender unknowingly in the position of financing an amount greater than the home’s purchase price.
Don’t inflate your income.
Imagine the home of your dreams comes with a price that’s steeper than you can afford. You might think it’s no big deal to up your income on your application in the hopes of qualifying for a bigger loan. If you’re an independent contractor or small business owner, you might assume you can boost your numbers without anyone realizing.In fact, the CoreLogic study found that this type of mortgage fraud, known as income fraud, was the most common type in loan applications for new homes, with 22 percent of applicants misrepresenting their income in applications reviewed between 2017 and 2018. You don’t want to be a part of that statistic. Lenders compare your application against your tax return. If they find a discrepancy, you’ll have two problems. You won’t get the loan, and you could be accused of income fraud.
Don’t borrow money for your down payment and label it as a gift.
It’s allowed, and certainly not uncommon, for a family member to help pay for your down payment. But that can only be done if it’s truly a gift, and not a loan you’re expected to pay back. Such a scenario is considered fraud because it would let you increase your down payment without increasing your debt-to-income ratio.
Don’t take a silent second mortgage.
A silent second mortgage is a second mortgage taken against an asset in order to get enough money for a down payment. It’s considered “silent” because the buyer keeps it a secret from the lender of the first mortgage. Doing this can get you into big trouble because your lender can track the sources of your down payment funds.
Don’t pretend the house you’re buying will be rental property.
On your loan application, you must be honest about whether it’s your primary residence or rental property. If you plan to rent out the property, you must note it on your application. Otherwise, you could be guilty of occupancy fraud. Although it might seem that all loans are the same, the issue is that it’s more common to default on a rental property than your primary residence, which is a consideration for mortgage lenders. As a result, loans for primary homes typically offer better terms and rates.
However, it’s simply not worth exposing yourself to the possible consequences of lying, which include the lender raising your interest rate, forcing you to pay off your full loan amount right away, or potentially foreclosing on your property.