But this article is not about you -- you're an honest person. This post is about those * other * people.
"We were gonna tell you...."
This happened to Lisa, a fellow loan officer when I worked at CTX Mortgage. Her clients were getting a cash-out refinance, the loan was approved, documents had been drawn and the borrowers were supposed to sign and close the next day. She was driving in the area and decided to run by the address and take a look at the house, just out of curiosity (many loan officers like real estate and houses are interesting to us -- we habitually check out clients houses if we happen to be driving by them). She turned onto the street and then slammed on the brakes -- the house was still smoldering where it had burned nearly to the ground a couple days before! Lisa called the client and got his bland response: "We were gonna tell you."
Maybe after they had the cash out from the bank and the check from their insurance company?
"Of course I'm going to live there!"
If you price mortgage financing, you'll notice that the best mortgage rates go to those who are buying or refinancing their primary residence. Vacation home loans come with slgihtly higher rates and more restrictive underwriting, and rental / investment property loans are the hardest and costliest to get. For this reason, some borrowers try to convince underwriters that a vacation or investment purchase is actually going to be their primary residence. This one, however, pushed the believability envelope wayyyy too far. It's kind of hard to get people to believe that you're going to live in a $150,000 tract house near the university when you have a $50 per month income and millions in investments. We asked, he insisted, and he got approved. After all, there's nothing illegal about buying a cheaper house than you can afford. But when the underwriting searched the assessor's Web site for property owned by the applicant's business, she found a bunch of rentals -- small houses and a few apartment buildings, and then -- jackpot! -- one lakefront home at Lake Tahoe. Purchase price, $13 million.
Why does anyone with that kind of money need to rcommit mortgage fraud to save a few thousand bucks?
"It's our dream home."
Then there was the happy couple building their "dream home" and looking for construction-to-permanent financing. When developers build homes "on spec," they get construction loans and hope to get the property sold before the loan comes due. This kind of financing is pretty risky, as you can imagine, and lenders require borrowers to contribute substantial skin in the game from their own pocket (sually about 30 percent). These folks applied for a primary residence loan and went on and on about it being the fulfilment of their dreams. They only put down ten percent. During the construction process, an appraiser had to routinely check the place and verify that work had been performed so that money (draws) could be released to the builder. One day, he called, perplexed, and sent me a fax with a picture of the property -- and the hige "For Sale" sign prominently placed near the street!. The borrowers had two choices -- foreclosure or accept a new loan with a prepayment penalty, which would kick in if they sold the property within a year of completion.
"That's my real income."
It's no secret that stated income loans -- aka "liar's loans" -- allowed many homebuyers before 2008 to purchase property they hadn't a snowball's chance in Hell of affording. Often these people didn't even have to make a down payment or have decent credit. Stated income loans today are harder to find, and lenders that make them require big down payments, assets that support the income claimed (you can't expect people to believe you earn $10,000 a month if you have $50.09 in savings) and bank statements or other docuemnts that show you have the cash flow and can afford the payments. Many self-employed folks who do their taxes aggressively can't meet this burden, so they try other methods. One client showed a very high income, six figures in fact, and very few write-offs. His taxes for the previous year also showed lots of income and little in terms of write-offs, and he seemed qualified. However, a check with the IRS uncovered the fact that the earlier return had been amended and the income almost doubled. The underwriter requested two more years of tax returns, and sure enough, they contained tons of write-offs and the income was about half of what was being shown on the new returns, even though the revenue was about the same.
While it's perfectly legal to amend a tax return, Freddie Mac cautions lenders that amended returns are ":red flags" for fraud.
The applicants did not get their loan. Sadly, had they been honest with their loan officer upfront, he could have probably gotten them approved, even at their lower income, because they had assets and their credit was excellent.
"I'll be there forever."
Finally, there was the extremely well-qualified applicant who got approved with automated underwriting in about 30 seconds and had a full credit approval in just a few days -- he was that bulletproof. The property was appraised, documents were drawn, everyone -- the sellers, buyer, real estate agents and the loan officer -- planned to meet at the title company (loan officers will do this if the borrower requests, to be on hand to answer questions or address last-minute problems) for the signing.
And then the bomb dropped. The borrower lost his job a fews day before the scheduled closing and the lender's quality control employees caught the change. He could sgn all the documents he wanted, but this loan was not going to fund.
Lying on a mortgage application today is dangerous. You'll almost certanly be caught, and the best outcome will be a delay in the loan closing and perhaps some embarassment. The worste-case ranges from loan denial to loan repricing to prosecution for fraud.
Think of your loan officer as a sort of lawyer -- tell this person everything. Your privacy is protected, and he or she won't allow you to do anything illegal -- but a good LO can often find ways (legal ways!) to get you around restrictions and through hoops, and get you approved for the loan you deserve.