Anyone that has been in the mortgage business long enough has seen or heard all kinds of unbelievable stories. Prior to the 2008 credit meltdown there were literally programs available that were commonly referred to as "liar loans". These stated income loans basically allowed borrowers to say they made however much money they needed to make in order to qualify for the loan. What could possibly go wrong there, right? Well since 2008 heightened regulations on banks and lenders has made getting away with misrepresenting items on your application nearly impossible, but it hasn't stopped people from trying. Here are some of the most common misrepresentations:
Failure to Disclose a Liability
Child support, alimony, and the likes don't always show up on your credit report. However, any good underwriter is going to find you that you are obligated to pay it even if you don't disclose it. It's best to tell your loan officer at the beginning about any liabilities you have that may not be reporting on your credit because you don't want them finding out later, say a week before closing. These are the types of things that can take you from approved to declined and require a suspicious activity report. One of the more amusing instances I've seen with um, let's say a lack of education of undisclosed debt, came from a designated real estate broker. He was approached by a car dealer about a referral partnership and was quite interested in it. The auto dealer actually told him that when a customer buys a car it doesn't show up on their credit for 45-60 days. He thought this was a good idea to pitch to his agents as a way to get buyers approved. Have them trade in their car for a new one before they get pre-approved for a mortgage and then when the lender pulls the report there won't be a car payment showing. I had to let the air out on that one a little bit. First off, the buyer signs documents regarding disclosure of all debts. If they knew they recently purchased a car then signed a 1003 not showing that liability they could be in big trouble. Secondly, when depending on when the loan officer pulls credit, the inquiry will show up and the buyer is then required to disclose the new debt. Failure to do so is fraudulent. Finally, even if it's not caught but the L.O. or processor the underwriter will refresh the credit report prior to closing and wonder what this new auto loan debt is all about.
Intent to Occupy
The failure to properly disclose the borrower's intent to occupy, or more importantly not occupy the property is also a gross misrepresentation. A Straw Buyer is someone that represents themselves as the buyer for the purpose of obtaining a loan for someone else. That is a little less common these days. What's more common is people that are purchasing a home that they intend to use as a rental and saying that it's a primary residence. The reason someone would do this is that interest rates are lower on loans for primary residences than investment properties. The down payment requirements are less as well. People often ask the question, "how would they know" if I don't live there. My canned response is, "Fannie Mae and Freddie Mac are basically government entities and FHA/VA are government, do the math". They know, and if you don't believe me you can ask a client of mine by the name of George. George was purchasing a home that he intended on living in but was adamant that we had to do it as an investment. The reason being was that he wasn't going to move in within the required 60 days. He had this happen with a previous residence and got in a little "hot water" (his words) when the lender found out. We ran his new property as an investment.
A mortgage application has a lot of fields and isn't always easy to navigate. That's why it's usually best to have an L.O. that will do the application interview with you either over the phone or in person. Most online applications are inadequate at best. Some misrepresentations are honest mistakes while others are completely egregious. Two recent examples I've encountered are on the egregious side of things.
The first one was either a straw buyer or something worse. I was contacted by an individual that said his mother was interested in purchasing a home but her English wasn't good so he would be my contact. After getting in contact with the mother and getting her permission to speak with him we moved forward. Every conversation turned up something more and more suspicious so I filed a suspicious activity report. I'll never know the results of this. I won't get into details but as it turned out the son basically made up a job that didn't exist for his mother at his company to get her to qualify. He paid her a weekly salary with a hand written check and when they finally broke down and provided bank statements it showed the money immediately being withdrawn. They tried to play it off as if they just didn't trust banks.
The second one was a little goofier. The borrower had a credit score that only allowed for FHA lending. Since we live in a community property state FHA requires us to include spousal debt in the borrower's ratio, even if they aren't on the loan. The buyer advised me that her husband was in the U.S. illegally and didn't have a social security number but the real estate agent swore that the title company would allow it. I confirmed again with the borrower that she was married and her marriage was recognized in the U.S. and state of Arizona. She replied yes, so I told her we couldn't help her. A few weeks later the real estate agent called me and told me that the same buyer had been under contract with another lender and was now being told she didn't qualify. I told the agent to send me the contract details and I'd plug the numbers in. The lender missed a debt that put her over the Debt To Income limit. What was strange was that the agent sent me the pre-qualification letter along with the contract and the marital status was marked as "unmarried". I'm not sure if this particular buyer didn't disclose her marital status to the new lender or if the lender or agent advised her to say she wasn't married due to her husband's legal status. The agent stated that she thought the buyer was unmarried but I advised her that I had several emails from the buyer stating that she is married. Again, this probably worked out for the best because had this loan advanced to underwriting a really nasty can of worms could have been opened up, unless the entire company was shady or incompetent.
Those were just a few examples of misrepresentations on a mortgage application. One of the forms that a buyer signs with their initial disclosure package is entitled "Mortgage Fraud is Investigated by the FBI". This is serious stuff. In my opinion most cases of misrepresentations on a mortgage application are honest mistakes and can be fixed during the application and loan process. Some of the examples I cited above were clearly intentional on either the borrower or loan originator's part and could land some people in hot water. Best practice is to always be honest in everything, but especially on your loan application.
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