July 24th, 2015 9:32 AM by Jackie A. Graves, President
Let’s start with the (blatantly) obvious: Getting a mortgage and
buying a house involves a lot of money. And the answers you give on your
mortgage application have a direct impact on how much money you’ll
get approved for—or whether you’ll be able to get the loan in the first place.
So it’s not surprising that some people may be tempted to fudge the facts just
After all, it’s just paperwork, and a little white lie. What can
A lot, actually. In fact, it can make the process downright
To begin with, the phrase “little white lies” is a bit of a
misnomer 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 whopper. And since lenders verify most of the
key information on your application, your chances of getting away with it
aren’t very good to begin with.
What are the possible consequences? Getting turned down for the
mortgage is the least of them. If your falsehood is discovered after you get
the loan, your lender could boost your interest rate or even demand immediate
repayment in full. Tax-related falsehoods could get you in trouble with the
In addition, penalties for mortgage fraud—which is what lying on
a mortgage application is—range as high as 30 years in prison and a $1 million
fine. You likely won’t face a penalty like that for a small exaggeration or
omission, but you could still end up with a fine and a conviction.
The following “white lies” might seem fairly harmless but could
get you into hot water once the truth comes out.
This is one of the most common. A person applies for a mortgage
to buy a home as their primary residence when they actually plan to rent it out
as an investment property. The benefit is that lenders charge higher interest
rates on loans to buy investment properties than they do for a primary
The borrower might think, “What difference does it make? A loan
is a loan. I’m responsible for it either way.” But lenders know that default
rates are higher on investment properties than they are on primary
residences—people try harder to keep up the payments when their own homes are
on the line—and that’s why they get lower rates than investors do. Minimum down
payments are significantly larger on an investment property as well.
From the lender’s perspective, you’re stealing money from them
by making them take on more risk than they agreed to. And risk costs money.
And don’t assume your lender won’t find out. There are several
red flags that can tip them off. Buying a home in a neighborhood that doesn’t
fit your socioeconomic profile is one. Another would be if 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.
It’s really hard to exaggerate your income on a mortgage
application. For one thing, your lender is going to verify all of the financial
information you provide on your application, so if your tax returns, bank
statements, W-2 forms, and the like don’t support your income claims, you won’t
get the loan.
The tax return is the big one. Your lender is going to request
copies of your two most recent ones, and will obtain them directly from the
IRS—you can’t simply alter 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
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.
Here’s one that many borrowers think is harmless: You’re short
for a down payment, so you ask a family member to front you the necessary funds,
and pay them back later. What’s the harm in that?
The problem is that when you apply for a mortgage, you need to disclose
all your other debt obligations on the application—and that loan from a family
member is one of them. It represents part of your financial burdens that will
compete with your mortgage payments for your financial resources. So your
lender will want to know about it.
If you receive down payment assistance from a relative or anyone
else, most of the time your lender will want you to provide a letter from them
stating that the funds are a gift and do not need to be repaid.
In some real estate transactions, borrowers and lenders are
tempted to “sweeten the pot” by making a side deal apart from the declared sale
price of the home itself. Often, this is in the form of a rebate or kickback
from the seller to the buyer when the asking price is greater than the buyer is
willing to pay.
The seller may offer to cover the buyer’s closing costs above
and beyond what is normal and declared. In some cases, the seller may even
cover the buyer’s down payment. Such arrangements may be allowed in some
situations, but what makes them fraudulent is when the lender is out of the
loop—when they’re done separately from the official sales transaction and
without the lender’s knowledge.
The harm here is that the lender is being tricked into financing
more than the actual sale price of the home—so the lender is taking on
more risk than expected and would have a harder time recovering the money in
the event of a default.
In some cases, a borrower who doesn’t earn enough to qualify for
the desired mortgage may seek to enlist a bogus co-borrower. The co-borrower,
often a relative, falsely states that he or she plans to occupy the
residence and contribute toward paying the mortgage, and so his or
her income is counted toward qualifying for the mortgage.
The party who really gets hurt with this one are the
co-borrowers. Even if they aren’t actually contributing toward the mortgage,
it’s listed as an obligation on their credit report. So if they later decide to
buy their own home or take out some other large loan, it’s going to hurt their
In addition, they could get stuck with the loan itself if you’re
unable to keep up with the payments, since they also signed off on the loan.
Not only that, but any payments you might miss will damage their credit as
well, since both of you are equally responsible for the mortgage.
People will sometimes be tempted to stretch the truth a bit when
it comes to reporting their employment on a mortgage application. For example,
claiming you’ve been working for a company for three years when you’ve been
there for only one—because lenders want to see at least two years of steady
employment before approving a mortgage (changing jobs in the same field is OK).
In other cases, they may claim to own a nonexistent small
business or get a friend to pose as an employer for whom they work at least
part time. But neither of these will help unless your tax returns support the
income you claim.
One of the keys to getting approved for a mortgage is your
debt-to-income ratio. That is, how much of your earnings you have to pay out
each month to cover all your debt payments. So some borrowers will omit listing
certain debts on their mortgage application to try to make it look like they
owe less than they do.
This rarely works. For one thing, just about all established
creditors—banks, credit card companies, auto lenders, medical services,
etc.—are going to report your debt and payment history to the credit-reporting
agencies. Your lender is going to pull your credit history when you apply for a
mortgage, so it’s going to find out about it.
This is also a great reason to check your credit reports before
you apply for a mortgage, too—to know what a lender will see. You can get a free credit report summary every month on Credit.com to watch for important changes, and you
can get free annual credit reports from AnnualCreditReport.com.
Similarly, some borrowers may try to game the system by taking
out a large loan just before the mortgage closes—perhaps by using a cash
advance on a credit card—and hope it doesn’t show up in the credit-reporting
system before the mortgage is closed.
However, when you sign off on a mortgage, one of the things you
sign is a statement that the information you’ve provided is accurate to the
best of your knowledge. If you took out a big loan the day before, the
information on your application is no longer accurate—and that’s mortgage
This article was written by Kirk Haverkamp and originally published on Credit.com.
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