Congratulations! You got a 150% raise.

Congratulations! You got a 150% raise courtesy of your loan officer.
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NOTE: The following story is a real case and it can happen to you, your family, or your friends.  Warn them!!! 
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What would a 150% raise mean to your families income?    It would mean a substantial increase in "extra" income, to qualify for a mortgage, buy luxury items, get a new car, purchase that 65" plasma TV, take a vacation to Australia, right?  WRONG!   

I am not talking about your employer offering you a bona-fide raise, no...I am talking about mortgage fraud brought to you courtesy of your loan officer.   

Recently I counseled with a young couple interested in purchasing their first home.  Usually I would say that I am one of a few people they had talked to already during their process of looking for a mortgage, however I am one of three, yet they were declined for a mortgage SIX times.  "Do you have copies of the declinations", I said.    

Typically when I first speak to a prospective buyer, I gather some basic information and enter it into one of my loan analysis programs this gives me different loan programs the buyer could be approved for based upon certain facts, including credit, income, employment, assets, existing debts, how much they are borrowing, down payment, etc.  The system reviews all items together and creates a decision based upon risk.  Generally the system is conservative but provides flexibility for stronger credit worthy borrowers.  These borrowers have 660 credit scores, they are average credit risk borrowers.  

After I speak to the borrowers I meet with them to gather basic documents to confirm the numbers in my analysis.  Remember, GIGO (garbage in garage out), so accuracy is important to me and I try to err on the side of being conservative.   

In regards to the case of my example, we are reviewing the loan application and their approval, the borrowers wage earning gross income is approx. $4,800/mo from one individual, the other individual does not work currently and legally they aren't married but they have children together.   

As we were going through their loan disclosures and items, we arrived at the loan application for their signatures.  Then on page 2 of the application the borrower stops and asks me, "why isn't $7,200 the income ...".  Puzzled, I looked at him and comment "your income...the amount listed on your paystubs and W2s, is $4,800, its your monthly income...why do you ask?".   

He then proceeded to tell me that the "other" loan people were putting incomes of $6,500, $6,900, and $7,200 on the application.  I then asked if he made that amount of money, he said "no...", but said "...the other loan officers said its ok that the banks allow it...".  I said, "yes they do, if you are commissioned, self-employed, are putting a large down payment of over 25%, and a few other comments, but you work at a regular job for the past 6 years and have been promoted to a supervisor and I can prove your income..."     

I asked the borrower if he received copies of his credit report and appropriate disclosures.  He said he has received nothing during the time he has been trying to buy the home since late January 2007.  I repeated his comments and said, "...so you have received no copies...?", He continued to nod his head and said "No..".   

Needless to say his comments are proof positive that most loan officers didn't care about this borrower or his needs in the future.  He was being placed into a PiggyBack loan product, where the first is an ARM and the 2nd is a fixed rate term loan.  More than likely the ARM would have been a fixed period of two years and possibly be interest only, however since he has no copies to show me, I can only speculate.   

Remember he was declined for these loan since they are not verifying his income and due to the rash of subprime loans that are defaulting and the number of lenders that have pulled the plug on these loan types they cannot find a lender who will offer 100% financing program without verifying income to a borrower who is a wage earner with decent credit scores of 660, some asset reserves, and modest debt.   

What will happen to our borrower and his quest for a home?   

He has been approved for a comforming loan with $500.00 down, on 30 year fixed with Lender Paid Mortgage Insurance (LPMI).  The rate for his case as of Friday was 7.125% (base rate of 6.375% and .75% for the LPMI).  His DTI ratio initially is a bit higher than I would like to see, however he has a fully amortizing loan and eventually, the LPMI portion of his loan can be removed and his payment will be lower in the future.  Also, his fiance' will start working again at some point in the future, part time and bring another $1000.00/mo to the household, which will help quite a bit.   

These folks are now on their way to successful home ownership without having to worry about their rate increasing in two years and not being able to refinance out of their loan since the values may still be flat at that time.   

I am thankful to the real estate agent who sought out another opinion on behalf of the buyers to help them not only get educated on their largest and most important purchase of their life, but also to finally understand their credit report, their loan, and their responsibility to make the monthly payments as the come due each month.  

Once this transaction moves forward and is closed, I will provide an update and with the borrowers permission, will even print more facts pertaining to their case, but until that time, you will have to hear me speak about the case speculatively.   

So the next time you get a raise of 100%, 150% or 200% without really earning it, think twice before you sign that loan application.  This is mortgage fraud.  It's a Federal violation to knowingly defraud a lending institution. There are serious consequences involved, fines of up to $1,000,000 and up to 30 years in jail.  Is it worth it?