Lew Sichelman
The fact that Sen. Adam Schiff and Federal Reserve Governor Lisa Cook have been accused by the Trump administration of lying on their mortgage applications should serve as a warning and a reminder to everyone looking for a home loan: Always tell the truth.
The charges against Schiff and Cook seem to be politically motivated. Still, it’s a federal offense to lie on an application for financing. Even if it’s doubtful you’ll be prosecuted, lying on an application is fraud, and fraud is a crime.
Your loan officer might hint that you should say you earn more than you actually do, or whisper that it’s OK to fudge your employment history. But don’t do it. If you are caught, the consequences can be severe. How does up to 30 years in prison and up to $1 million in fines grab you?
Even if you are not prosecuted, if your lender finds out you equivocated, they can call your loan due and payable on the spot. You can be required to pay back what you borrowed – immediately.
‘Little’ White Lies Rising
The lies we’re talking about aren’t grand schemes organized by crime syndicates to defraud lenders out of millions of dollars. No, we’re talking about little white lies – the kind that everyday people tell to obtain funding for a house (or a lower rate on that funding). They fully intend to make their payments as promised, and they usually do. Nevertheless, it’s fraud.
Unfortunately, with today’s ever-increasing housing prices, stubbornly high mortgage rates, rising property taxes, and soaring insurance premiums and homeowners association fees, more and more wannabe borrowers are seeing the need to fib on their applications.
According to property information and analytics firm Cotality, mortgage fraud has been “gradually rising over the last year.” In this year’s second quarter, about 1 in 116 applications contained at least one instance of fraud.
Loan application fibs are likely to be caught during the underwriting process. Lenders employ all manner of verification methods, including the review of pay stubs, W-2 forms, tax returns, credit reports, bank statements and appraisals.
Still, only 58 offenders actually drew federal sentences in fiscal year 2021, according to the U.S. Sentencing Commission.
Common Types of Lies
Here are some of the lies people tell:
Maybe the applicant is due for a raise, so they write down what they’ll soon be making instead of what they currently bring in. Others claim to have been on the job for longer than they really have. Some even go to the trouble of creating fake documents and pay stubs to back up their claims.
Sometimes these fabrications slip through, but you’re likely to be caught when the underwriter goes over your application. They’ll be looking at your recent tax returns and seeking verification from your employer, so your fibs will likely get you nowhere. And the underwriter will then wonder what else you’ve lied about.
Residency is also a common area for fibs. The house is the basis for the loan, and your lender will want to make certain it is your principal residence. If it’s not, you’ll have to qualify as an investor – and those loans have more stringent requirements and higher rates.
Some people try to deceive their lenders about their residency to obtain better terms. Others might do so to help a relative or friend – the person who will actually occupy the place, but who can’t qualify for the loan on their own.
The allegations against Schiff and Cook state that they violated the principal residency requirement. While you’re not likely to face such scrutiny, the consequences can be severe if you are caught.
Where’s the Money?
Money source is another big one. Lenders want to see that you are putting up plenty of your own money as a down payment. After all, studies have shown that the more cash you have in the deal, the less likely you will be to miss payments and ultimately walk away from the house.
That’s why they want to document exactly where your funds came from. In particular, they will be looking to verify monetary gifts, which are treated a little differently from your own savings. They’ll also want to know if those “gifts” are actually loans, which have to be repaid.
Instead of lying about where your funds come from, it’s better to be upfront and document your sources.
People sometimes lie about other accounts they have. Any other current loans, along with any previous bankruptcies and foreclosures, must be reported on your application. They affect how much you can borrow – or whether you can secure financing at all. “Forgetting” to include them won’t do you much good, because they are part of your credit history and will remain on your record for years.
Your lender will pull your credit report as part of the underwriting process. But even if they somehow fail to do so, all you’d “win” is a mortgage for much more than you can afford.
And last of all, mortgage fraudsters sometimes like about their status, in various ways. Don’t misrepresent the fact that you are married, have dependents or are (or aren’t) a first-time homebuyer. Lenders check all of this. If they find out you were less than forthcoming, your application will be turned down, and your chances of obtaining financing elsewhere could be jeopardized.
Lew Sichelman has been covering real estate for more than 50 years. He is a regular contributor to numerous shelter magazines and housing and housing-finance industry publications. Readers can contact him at lsichelman@aol.com.
