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 a bit.
After all, it’s just paperwork, and a little white lie. What can it hurt?
A lot, actually. In fact, it can make the process downright excruciating.
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 IRS.
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 wateronce the truth comes out.
1. Who will live in the house
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 residence.
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.
2. How much money you make
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 match.
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.
3. The origin of your down payment funds
Here’s one that many borrowers think is harmless: You’re short of cash 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.
4. Undisclosed incentives/rebates
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.
5. A bogus co-borrower
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 debt-to-income ratio.
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.
6. Your employment status
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.
7. Hidden liabilities
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 fraud.