It’s easy to think of mortgage fraud as the kinds of crimes committed by predatory lenders -- stuff you read about on the news. What you don't read about, however, is the type of fraud your garden variety mortgage applicant can commit.
A study by CoreLogic found that an approximately 1 in 109 mortgage applications contains instances of fraud. Even if your intent is not to be malicious, the tiniest of white lies on your mortgage application could land you in scalding hot water, since it is a federal crime punishable by up to 30 years in prison, a fine of up to $1 million or a combination of both.
Here are things you should NOT do as a mortgage applicant:
Lie about your income. Lenders know that with increasing home values and rising interest rates, prospective homeowners are eager to get into a home before any future increases take place. But if the house you’ve got in mind is not within your means, you might be tempted to inflate your income in order to qualify for a larger loan — something most frequently done by sole proprietors, freelancers, or small business people. According to CoreLogic’s study, income fraud, which involves misrepresenting the existence, continuance, source or amount of income used to qualify for a mortgage was the most common type of fraud the company saw in residential loan applications it reviewed from 2017 to 2018. You’ll be walking down a slippery slope fudging your income anyway because mortgage lenders verify your income against your tax returns. If the numbers don’t match, you won’t qualify, AND you could be accused of attempted fraud.
It’s not uncommon for parents to offer gift money to their kids for the down payment on their homes. It’s allowed, but there are definitely rules surrounding the giving of that gift. One of those rules is that a loan can’t be passed off as a gift. Doing so allows the homeowner-to-be to bump up their down payment without increasing their debt-to-income ratio, and it’s fraudulent.
Another way to commit mortgage fraud is to borrow money against an asset in order to come up with more funds and then keep that loan a secret from the mortgage lender — a dastardly deed known as a silent second mortgage. Don’t try it. You’ll get caught anyway, since your mortgage lender will require a paper trail on all the funds used for your down payment. If you’re caught lying, the consequences can be severe.
Making a deal on the side with the seller of a home without disclosing it to the lender is another way to acquire bad legal juju. In attempts to get their homes sold, some homeowners will incentivize the deal by paying for some of the buyer’s repairs, closing costs or down payment. It’s not unusual for homebuilder builders to offer their buyers incentives, but NEVER without it being disclosed to the lender. Any financial deals between buyer and seller made outside of the official sales transaction and without the lender’s knowledge are considered fraudulent because the lender is being tricked into financing more than the home’s actual purchase price.
There are owner-occupied loans and non-owner occupied loans, and never the twain should meet. If you’re buying a piece of property in order to generate rental income rather than live in it as your primary residence, you have to say so on your mortgage application. If you don’t, you’ll be guilty of what’s known as occupancy fraud. While you may not see why it’s a big deal, mortgage lenders see it as a huge one. Why? Because rental properties experience a higher rate of default than primary residences — a reason owner-occupied interest rates are lower than those for rental properties. Lately, this type of fraud is being discovered among the Airbnb host community. Once discovered, those owners will find their interest rates raised, make their entire loans immediately due and payable, or they may even foreclose on the property.
Bottom line? Any attempt to commit mortgage fraud is simply not worth it.
Source: CoreLogic, TBWS