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It doesn’t happen often, but occasionally credit reports are missing some information. What about child support from before your current marriage? That doesn’t show up at all on a credit report. Should you tell the loan officer or just keep it to yourself. If it’s not on the report it doesn’t count, right?

Your loan and your credibility are at risk

You can go to jail if you deliberately withhold information from your mortgage application. It is called fraud and it’s not worth the risk. If you have ever wondered whether or not you must let a loan officer know about something that isn’t on you credit report, now you have the answer. Everything you know about your debts or obligations, regardless of if it may be on your credit report, must be disclosed to your lender. The lender is considering lending you thousands of dollars and has the legal right to full information. If that lender makes a decision to loan you money and finds out later that you withheld pertinent information, you could still go to prison.

Think of it this way. If a friend of yours asked you for a loan, but didn’t tell you something financially critical like they just totalled their car after a hard night of partying and need to get another one as soon as possible. And they didn’t tell you until after you gave them money. You’d be pretty ticked off, wouldn’t you? I would be. Without a car, your friend probably can’t get to work. And no work means no money. So of course you are going to wonder how they’ll pay you back.

A mortgage lender is in exactly the same position. They are making a decision based on a lie of omission.

Here’s the good news

Your loan officer can probably get your loan approved anyway. There are so many creative loan programs available these days, your debt ratio may not be as bad as you think, to a lender. If the lender agrees to make a loan after you have told everything there is to tell about your debts, you have nothing at all to worry about. The lender knows what he needs to know and fraud is no concern of yours.

So, if you have ever wondered about that hidden obligation or been tempted to keep it all to yourself, go with the honest solution and let the loan officer do his or her job. It works better for everybody involved. The honest solution allows you to stay out of jail and live in a nice house. The other decision? Well…..visitors are allowed!

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Tags: kitsap real estate blog, mortgage fraud, real estate fraud, seattle real estate blog, silverdale real estate blog

I believe most people are basically honest. Sure, we cut corners at times. We deduct items on our tax returns that may not be quite legitimate. We call in sick to work when we just want a day off without having to explain the true reason. Most people though, would never think of robbing a friend, or lying to their children.

But, there is one area when it comes to home loans where I see folks take a very casual approach to something that can land them in some very hot water.

Pull your chair in closer to the desk and give me five minutes to explain what I mean. It will be worth your time.

Liar’s Loans?

One of the first industry slang terms I heard as a new Loan Officer was ‘Liars Loans’. Of course, I didn’t want to appear ignorant so when time allowed, I turned to my trusty computer to tell me what the term meant. As you have guessed, it’s the derogatory phrase for any Stated Loan product. The attitude behind the term still fascinates me. Does it mean that mortgage professionals have become so used to the abuse of a legitimate loan product that they have become cynical? Yet, the abuse could not have been perpetrated without the loan officer’s involvement, could it? So do they feel cynical towards the clients, or themselves?

What makes a Stated Income Loan legitimate?

The simplest example of a legitimate Stated Income Loan pertains to restaurant employees. Often, the majority of their income is derived from tips. Many restaurants have their servers claim the IRS minimum of 8% of the day’s receipts. The employee has no control over this unless they are willing to change employers. In addition, tips are often paid in cash. Cash goes into the purse or wallet at shift’s end. On payday, the paycheck is deposited in the bank. Items like gasoline and groceries are paid for with the cash. Items like rent are paid from the bank account. There is nothing wrong with this system. It works well for thousands of American waiters and waitresses.

The problem becomes obvious when they apply for a mortgage loan. There is no way to prove their true income! Their employer didn’t provide the IRS with an accurate accounting, so they can’t produce an accurate W2. The tips were never deposited in a bank so bank statements won’t work. And the tips were paid in cash so no cancelled checks are available. These borrowers legitimately earn more than they can prove. Hence, the need for a non-standard type of loan.

When is it mortgage fraud?

The answer is very simple. There is no such thing as a white lie when you are applying for a mortgage! A Stated Income Loan cannot be used simply because you don’t make enough to qualify for the mortgage you want to get. There are other loan programs available for those situations like No Ratio Loans or No Doc Loans.

What I see happening all to often is this. A client meets a Loan Officer and brings along all the requested paperwork. The client arrives with bank statements, tax returns and paystubs. The Loan Officer proceeds to enter data into a computer program prior to printing up paperwork and finds that the client’s income is too low to fit the loan guidelines. One of two things happens at this point. Either the client asks, “Well can’t we just get a Stated Income Loan?” or worse, the Loan Officer says “This won’t work, we’ll have to go Stated Income”. The client might have a defense, if they don’t understand what these loans are for. The Loan Officer has no defense.

In either case, mortgage fraud is about to happen if both parties proceed on with a Stated Income Loan. You cannot just fabricate an income!

If this is suggested to you as a borrower, don’t go along with it just because the person across the desk seems sure of themselves. If you can’t say “I told the truth, the whole truth and nothing but the truth”, something is very wrong. Your money, your home and your future are in peril.

Stated Income Loans were designed to solve a very specific problem. They were never intended to solve all problems. As a borrower, you have a right to expect a mortgage professional who can lead you through the maze of available loan programs with accurate knowledge. But remember, ignorance of the law is a very weak defense. Most courts take a dim view of a defendant who’s only defense is “Gosh, I didn’t realize it’s wrong to lie!”.

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