Did you change jobs in the middle of your home buying process? Were you employed when you started the process and then became self employed? Even if you're in the same line of work, the bank will most likely not finance your loan.
Did I commit fraud on my mortgage application?
I was having my weekly meeting with a circle of Realtors this morning and some discussions were going around with regard to potential buyer fraud during the course of the transaction. After our meeting, I forwarded this blog post to all of the agents who were involved in this discussion. Because of the timing, I thought what better time to repost this here.
Did I commit fraud on my mortgage application?
It came to my attention recently that it appears many folks possibly aren't being coached or taught properly as to what you, as the borrower should be, and more importantly, should NOT be doing, before, during and after the mortgage application process. In this post, let's get into some important information with regard to potential fraud on a mortgage application.
It's important for borrowers to understand that any change they make to their current credit, financial, or employment picture could very well have a negative effect on their ability to secure the financing they are seeking. I'm sure the last thing that any borrower wants to hear is that several weeks into the lending process, their loan was declined due to lending policies and protocol they weren't even aware of.
In light of this, I'd like to offer the following in hopes this will save anguish and grief to those who may be seeking to obtain a new mortgage loan and want to avoid any potential fraud with regard to the mortgage application.
I just recently spoke with a potential client who was unable to secure financing with the lender she had been working with for the past few months because in this case, her employment status had changed. Just weeks before the close of escrow date on the purchase, it was learned that this borrower had gone from being a salaried wage earner, to now being self employed. You may ask yourself, "So, what's the big deal? If there's still a job, why can't the bank still lend the money?" The answer to that may not be as simple as one would think.
In this case, the client remained in the same line of work. So simple, right? Actually, no. The typical rule of thumb when lending to a self employed individual is that the lender will want to evaluate two years worth of tax returns in order to determine income eligibility. So in the above case, because this client just recently put themselves on a self employed status, of course, there aren't tax returns available to determine what newly self employed earnings even exist. Again, you may ask yourself "I don't understand the problem. If the client is in the same line of work, and they've been doing that job for a significant period of time, why won't the bank lend the money?" Well, let's look at it this way.
Let's say you are a baker for a local grocery store in their bakery department. At the beginning of your loan application you provided your mortgage lender with current pay check stubs and your W-2's for the previous two years. So, sometime during the mortgage approval process you think to yourself, "heck, I'm one of the best bakers here at the bakery, I bet I can make more money selling my cakes and cookies on my own rather than just working for the bakery department!" While you may be the best cookie and cake baker out there, merely having the skills to bake a cake, doesn't necessarily mean one has the ability to run their own business. There are licensing requirements, food safety and health issues, and all of those things would currently be on the shoulders of the grocery store. That is their liability issue, not yours as the employee. So, from a lender's point of view, they have no way of knowing or verifying how well this business is going to succeed, since there is no documented history of it. Make sense?
So, with regard to the actual client I cited. After they understood the "why" obtaining financing would be most impossible due to the newly self employed status, I offered suggestions as to how we could possibly proceed in still obtaining a loan approval, providing they went back into a W-2 status. The lender would require a very good letter of explanation regarding this. In this case, unfortunately, the client wasn't willing to proceed as per my suggestion. Instead, they gave me reason to believe (verbal information they provided to me over the phone) that documents could in essence be "manipulated" to indicate they were still salaried. They wanted no one to be the wiser they were really self employed.
So, several problems occurred because of this. Falsifying of any credit documents or providing misleading or false information on the mortgage application can be flagged as fraud. Regular pre-closing and post-closing audits are conducted on mortgage files. Should an audit determine fraud on the mortgage application was involved, not only could the lender call the note "due and payable", but parties involved in the transaction could face prosecution.
Consumers should also be aware of that many lending and bank institutions' employees are required to report any suspicious activity through the SAR (Suspicious Activity Report) or similar, reporting system.
I believe it's the goal of all lending institutions and their employees to make the mortgage process as easy and seamless for all parties involved, and I believe the best way to achieve that is for the borrower to be educated in what's involved. In addition, I feel it's important for the lending professional to successfully coach their clients as to potential pitfalls that may occur during the process, or even after the transaction has closed.