When you think of mortgage fraud, you might imagine predatory lenders attempting to rip off unsuspecting homebuyers. But as a mortgage applicant, it’s possible for you to commit fraud, too. In fact, it’s estimated that 1 in 109 mortgage applications contains instances of fraud, according to a study by CoreLogic.
Even if you don’t intend it to be malicious, a little white lie on your application could land you in seriously hot water. Mortgage fraud is a federal crime that’s punishable by up to 30 years in prison, a fine of up to $1 million or a combination of both.
Here are five moves to avoid, as tempting as they may be.
1. Fudging your income.
With increasing home values and rising interest rates, prospective homeowners want to get in while they still can. If the home you’ve had your eye on is just a bit out of your budget, you might be tempted to inflate your income in order to qualify for a larger loan. That’s especially true if you freelance or own your own business, which might make it easier to fudge the numbers.
You wouldn’t be the only one. According to CoreLogic’s study, income fraud ― which involves misrepresenting the existence, continuance, source or amount of income used to qualify for a mortgage ― was the most common type of fraud the company saw in residential loan applications it reviewed from 2017 to 2018, at more than 22 percent.
But you wouldn’t be wise to try to misrepresent your income. Mortgage lenders verify your income against your tax returns. If the numbers don’t match, you won’t qualify ― and you could be accused of attempted fraud.
2. Borrowing money for a down payment and calling it a gift.
It’s not uncommon for family to help out with a down payment. Maybe your parents contributed a few thousand dollars to help you get into your dream home. While it’s definitely allowed, using gift money for a down payment does come with a few rules. And one of those rules is that the money can’t be given in the form of a loan that’s to be paid back.
“Not only is it fraud, but owing a large sum of money to a family member is a good way to cause a financial dispute with your loved ones.”
– RON STROBEL, CERTIFIED FINANCIAL PLANNER
Passing off a loan as a gift allows the homeowner-to-be to bump up their down payment without increasing their debt-to-income ratio, according to Ron Strobel, a certified financial planner and founder of Retire Sensibly. “Not only is it fraud, but owing a large sum of money to a family member is a good way to cause a financial dispute with your loved ones.”
3. Taking out a silent second mortgage.
Representing a loan as a gift is not the only way to commit mortgage fraud with your down payment. Some borrowers who can’t afford the down payment on their mortgage will borrow money against an asset in order to come up with the funds and then keep that loan a secret from the mortgage lender. This is known as a silent second mortgage, and it’s a major no-no when it comes to homebuying.
Again, going this route is risky because your mortgage lender will require a paper trail on all the funds used for your down payment. If you’re caught lying, the consequences can be severe.
4. Striking a deal with the seller and failing to disclose it.
When a home’s list price is higher than a buyer is willing or able to pay, the seller might attempt to incentivize a sale by striking a deal on the side. For instance, the seller might agree to pay for some of the buyer’s repairs, closing costs or down payment. And, in some cases, these types of deals are allowed ― but only if they’re disclosed to the lender.
Any financial deals between buyer and seller that are made outside of the official sales transaction and without the lender’s knowledge are considered fraudulent because the lender is being tricked into financing more than the home’s actual purchase price.
5. Listing rental property as your primary residence.
If you’re buying a piece of property in order to generate rental income rather than live in it as your primary residence, you have to say so on your mortgage application. If you don’t, you’ll be guilty of what’s known as occupancy fraud.
You might be thinking, “A loan is a loan. What difference does it make?” But to mortgage lenders, it makes a very big difference. That’s because rental properties have a higher rate of default than primary residences. After all, if times are tough, you’re probably going prioritize keeping your home over other investments.
But it’s no wonder why someone might be tempted to lie. Mortgages for owner-occupied homes tend to provide more favorable financing terms and lower interest rates, according to Strobel, who noted that occupancy fraud is becoming increasingly common among the Airbnb host community.
Despite the potential savings, however, taking the risk isn’t worth it. If you’re caught, your lender might raise your interest rate, make your entire loan due immediately or even foreclose on the property.