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Maybe it's just me, but every single time we buy a home, it feels like the first time. The house we live in represents our ninth home purchase, so you might think we would be homebuying pros by now. We are not. Each time we apply for a new mortgage I make a list of everything we need to provide, as though we'd never done it before. I use that list as my guide, marking off items only when they are safely in the lender's hands.
A recent conversation with a loan officer reminded me of the silly ways people attempt to secure a mortgage, without realizing how quickly they will be found out. Mortgage lenders are savvy by nature. They want to protect their investment, which means going the extra mile to ensure a borrower is on the up-and-up.
If you do not want to embarrass yourself (or ruin your chance to land a mortgage), count on your lender finding out about the following:
1. Fudged income
You know how a lender asks you to provide a certain number of pay stubs and W-2s? During the underwriting process, the lender goes through them to make sure they match up with the amount you claim to earn. If you tell a lender that you pull down $75,000 a year, but your pay stubs and W-2s tell another story, they will look to you for an explanation. Think of it as the first security door.
The second security door involves the mortgage lender requesting a copy of your tax transcript. Unlike a "regular" tax return, a tax transcript provides the lender with information relevant to your loan, including the amount of income you claimed.
Our loan officer told me about a potential borrower, a self-employed man who reported one income to the lender, and another to the Internal Revenue Service (IRS). He told the lender how successful his business was, and told the IRS that his business operated at a loss. He even went so far as to use TurboTax to prepare a faux return showing how much money he'd earned the previous year.
In his rush to apply for the loan, chances are the guy didn't realize he'd signed a Form 4506-T, a document that permits the IRS to mail a copy of your tax transcript directly to the lender. Creating a fake return may have seemed like a shrewd move, but it backfired. The moment the lender realized that he'd fudged his income, it denied the loan application.
2. Hidden debt
Your debt-to-income (DTI) ratio tells the lender how much you owe relative to how much you earn. The less you owe, the more money you have each month to meet your financial obligations. DTI is calculated by dividing your monthly fixed obligations by your monthly income. For example, if you make $60,000, you have a monthly gross income of $5,000. If your bills (rent, auto, credit cards, student loans, etc.) run $2,000 per month, your DTI is 40% ($2,000 ÷ $5,000 = 0.40).
According to the Consumer Financial Protection Bureau, a DTI of 43% is the highest ratio a borrower can have and still be eligible for a standard mortgage. If you fear your debt load is already too high, you may be tempted to omit some obligations from your application. After all, how likely is it that your lender will find out about the cabin you co-own in Northern Michigan, timeshare you impulsively purchased in Boca Raton, or boat loan your cousin talked you into cosigning?
Very likely. In fact, you can count on your lender to learn of any "hidden" debt. That's because today's lenders use services like Credit Plus and FraudGuard. These web-based tools quickly comb through public, private, and proprietary data sources to peek into the nooks and crannies of your financial life. If something does not show up on your credit report, these services will uncover it.
3. Past financial hardships
Everyone has a few not-so-wonderful memories stored away in their mental library, and most have an embarrassing financial experience or two. No matter how much you would like to forget about a short sale, foreclosure, bankruptcy, or any other significant financial upheaval, you must be honest with a potential mortgage lender.
Most bankruptcies remain on your credit report for seven years, so there is no use in hiding one. Short sales and foreclosures also stay on your credit report for seven years. However, if it's been three years since either event and the rest of your finances are in good order, you may still qualify for a mortgage aimed at people with poor credit. Find out by being upfront with your lender.
4. Spending sprees
Imagine that you've been approved for a mortgage. In a state of celebration, you buy a car to impress your new neighbors, then use credit cards to purchase furniture and a hot tub for that gorgeous new deck.
Our loan officer said I'd be surprised by the number of new homebuyers who rack up debt as they wait to close on a home. He said his company receives a "ding" from Credit Plus anytime a borrower takes on debt up to (and including) the date of closing. Once they have been dinged, the lender must recalculate the borrower's DTI. If the new debt puts them over the limit, they must either pay it down immediately or risk losing the mortgage.
Not only could white lies cost you your mortgage, you might also lose any earnest money you've paid. And in some cases, you could face criminal charges for fraud. Beyond the risks, buying a home is nerve-wracking, even when all the pieces are in place. Why make it more difficult by excluding information that your lender is sure to find out about anyway?
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