Many times, the stress that comes with taking out a mortgage becomes so great that we forget that there is another party that is undergoing considerable worry on our behalf – the lender. After all, a mortgage application is a request for a lot of money, based on the trust that the lender has that you will make payments on time.
A lot of the lending decision comes down to the information that you put on your application. It can be tempting to play around with the truth a little bit, and to put information on the paper work that is not quite true. You might wonder what the harm is – after all, you have the means to make your payments on time, and you don’t have any intention of defaulting.
However, lenders have to make decisions on the basis of probabilities, not on the basis of what your intentions might be. That’s why borrowers who get caught misrepresenting information on mortgage applications face a variety of sanctions, just the least of which could be having your application denied. If the lie emerges after you have been funded, the lender could alter your interest rate – or even ask for all the money back right away, and in full.
Then there’s the fact that mortgage fraud (which, even if it is just one white lie, is what you have committed by misrepresenting facts on your application) can send you to jail for years and cost you a hefty fine. Here are some lies that people have told in the past that have scuttled their applications and, in some cases, led to further sanctions.
1. Lying about credit issues from the past. If your spouse didn’t really go through an expensive battle with cancer a decade ago, don’t make one up. It’s not worth it. Don’t send in your application without any explanation for those credit issues, though, because that can be seen as a lie of omission. Be honest about why your credit suffered in the past.
2. Failing to mention previous declines or mortgage inquiries. Did you know that the credit bureaus receive information about all mortgage inquiries? If your down payment is small enough to mandate mortgage insurance – but the mortgage insurer denied you on your last application – let your potential lender know.
3. Lying about the occupants of the house. This happens a lot, as people apply for a mortgage as the primary resident, even though their actual idea is to rent the house out for investment purposes. They do this because mortgages for investment properties tend to have higher interest rates than those for primary residences, because people are more likely to default on mortgage in houses they don’t occupy – foreclosure won’t put them out on the street.
Another reason has to do with the minimum down payment, which is generally much higher on an investment property than a primary residence, for much the same reason. A primary residence mortgage carries less risk for the lender than an investment property mortgage does, so the terms are going to be different. If you are buying a home that is not in a neighborhood that matches your socioeconomic profile, or if you have your statements sent to a different address, that could tip off the lender to take a closer look.
4. Lying about your income. This isn’t a very smart lie to tell, because your income tax documentation will also indicate how much money you make. Your bank statements will show how much money you have coming in each month. If those numbers don’t match up, then you’re not going to get the loan. Even if you are self-employed, this still true, so make sure that you don’t make your potential lender by telling an untruth that is so easy to check.
5. Lying about where your down payment comes from. If you have to borrow down payment funds from a friend or relative, you won’t be the first one. The problem is that this adds to your debt-to-income ratio. When you fill out that mortgage application, you must indicate all your other debts – and a loan is one of them, even if it is to a relative. This is why lenders will often ask for a letter from the person giving you the money to verify that it is not a loan.
6. Hiding other liabilities that you have. That debt-to-income ratio is the most powerful metric that lenders use in their decision-making processes. Some borrowers try to improve this ratio by listing just a few of their debts, instead of all of them. Well, all of your creditors report your debts and your payment history to the credit reporting services, even if you make all of your payments on time. So when the lender runs your credit, all of your debts pop up – not just the ones you listed on your application. Some people misrepresent their debt history by accident – they didn’t check their credit reports before sending in their applications. We recommend that you have a credit report issued on yourself before you send in that application so that your paperwork accurately reflects your financial picture.
7. Misrepresenting your employment history. Banks like to lend money to people who have stability in their employment – many want to see two years of steady work history, at the very list, before they sign off on your mortgage. Hopping from one company to another, particularly in the same field, is fine, but if you have gaps in your employment history, that can lead to concerns. So here’s the best advice we can give you – don’t say anything about your employment history that your tax returns can support.
8. Incorporating incentives without notifying the lender. Sometimes a motivate d seller will offer to pay for closing costs in amounts that are greater than the typical amount and may even cover the down payment for the borrower, simply to get out of the house themselves. A lender could be tricked into extending more credit than the borrower deserves because of this incentive – or financing more than what the house is selling for. This extension of risk makes lenders upset – as one would expect.
9. Making up false co-borrowers. Some loan applicants try to get someone to make a false statement that they will also live in the house and contribute toward the mortgage payment. This leads to a greater income used as support for the application. The problem with this is that the lender ends up extending more credit than the borrower deserves. For that fake co-borrower, though, the loan goes on their debt report, which could also harm them if they want to get their own mortgage later, and if you default on this loan, their credit can really suffer as well.
The best practice is to tell the truth about your financial past. You’re much less likely to end up stuck in a mortgage you can’t afford, and to end up in a house that is stressing you out to the point that you don’t enjoy owning it.