“What we’ve got here is a failure to communicate.”
Spoken by Strother Martin to Paul Newman in “Cool Hand Luke” (1967), it’s one of the most iconic lines in film history.
If applied to borrowers and lenders, the famous phrase would be only slightly altered: “What we’ve got here is a failure to disclose.”
That’s because, frequently, when borrowers’ home loan applications are denied by lenders, it’s due to a lack of disclosure or transparency by the borrower. This innocent “oversight” may seem harmless to the borrower, but being fuzzy with or fudging the facts is a surefire way to have your loan application approval rejected. Outsmarting lenders is not so easy.
“It’s one thing to tell your 5 year old that Santa Claus is real, but quite another to conceal or stretch the truth on your loan application, which a lender uses to either approve or deny your loan,” said Kent Sorgenfrey, a lender with Irvine, Calif.-based New American Funding.
“Prior to the real estate crash, lenders could wing it a little as far as verifying a borrower’s information,” Sorgenfrey added. “Back then we worked on the honor system, we took the borrower at his word. But now, I don’t care if you have 800 FICOs and put 50 percent down, lenders are going to run your credit and make you jump through every hoop to confirm your financials are what you say they are.”
In the post-crash era of tighter regulations, Sorgenfrey wonders why anyone would be foolish enough to try to deceive his lender. “Whatever financial information you’re trying to hide is going to come out eventually,” Sorgenfrey said.
Yet, human nature being what it is, there are still borrowers who believe they can still beat the system by outsmarting lenders. They will:
1. Conceal a bankruptcy.
Bankruptcies and foreclosures can remain on your credit report for 7 to 10 years, so if you’ve experienced a bankruptcy in the last decade, it’s best to share it with your lender. If your bankruptcy was caused by job loss or a health issue and you’ve since reestablished good credit, you have nothing to hide. Even if your bankruptcy was brought on by irresponsible spending, it’s still best to come clean early in the loan process. Lenders don’t like last-minute surprises.
2. Hide unreimbursed business expenses on their tax returns.
If you’ve been racking up expenses for which you haven’t been compensated, such as driving significant miles to work, purchasing job uniforms, paying union dues or enrolling in night classes to get a promotion, these expenses will be deducted from your reported take-home income, which could change your qualifying debt-income ratio.
3. Cover up a business loss
To make ends meet, about 4.9 percent of working U.S. adults hold more than one job, according to the Bureau of Labor Statistics data. Many of these jobs can range from handyman repairs, tutoring or fixing computers to shearing sheep. Although many of these activities are part of a shadow economy, many moonlighters will report losses from their start-up businesses on their taxes, which will be flagged by your lender.
4. Increase their credit card debt
Having been pre-approved for a mortgage loan doesn’t give you license to start loading up your credit cards with new debt, such as financing a new car or furniture for your new home. When you submit a mortgage loan application, you certify that nothing about your credit has changed. So if anyone pulls your credit after signing this certification, your lender will be alerted (alarmed).
5. Fail to disclose an ownership interest
Lenders often require more documentation from self-employed borrowers. To skirt this demand, some applicants will not disclose their ownership in a company, listing themselves as employees rather than as part-owners.
6. Not mention a family tie
To help you out, a family member for whom you work might be attempted to inflate your true income or embellish your role with the company. Lenders prefer arm’s-length transactions.
7. Bury a silent second mortgage.
A borrower without a down payment can commit mortgage fraud by borrowing the down payment from the seller in exchange for giving the seller a silent second mortgage, which is unrecorded (or records after closing) and hidden from the lender.
8. Downplay a large deposit
Nothing is easier than tracking the flow of money, so should a large deposit hit your account, its source will need to be well documented by bank statements, copies of checks, bills of sale, or gift letters (showing your funds need not be repaid).
9. Fail to file tax returns
As lenders often use an independent copy of your tax returns to confirm the information on your loan application, it goes without saying, they need your up-to-date tax return.
10. Neglect to mention a job change
Depending on which statistical report you put stock in, between 8 and 9 million workers lost their jobs in the Great Recession. Not only do lenders want to know if you’re working, they want to know how long you’ve been at your present job. They’ll seek confirmation of your job status right up to your loan approval to ensure you’re working and still earning the income listed on your application.
11. Underreport property ownership
Even if you own desert acreage where only tumbleweeds blow across the landscape, it still requires tax and insurance payments. Interests in properties held under an LLC or corporation, of course, also must be revealed.
12. Omit alimony or child support payments
It might be a sore and sensitive subject, but regardless the size of your obligation, your lender needs to know about it.
13. Hide the source of the down payment
To show you have some skin in the game, you typically can’t borrow from family or friends or take out cash advances for your down payment. However, if you’re borrowing from your own assets, tucked away in a 401k or retirement account, you should be okay.
14. Attempt to buy properties simultaneously
There’s no law that says you can’t purchase multiple properties using different mortgages at the same time. The information just has to be disclosed so each lender can do its own qualifying calculations.
15. Fudge about owner-occupancy
Some borrowers who have no intention of living in the stated property say otherwise because lenders assign higher rates and less favorable terms to non-owner occupants. Typically, a few weeks after a loan closes, a conscientious lender will check the house to make sure that the borrower is the home’s primary resident.
Seasoned, experienced lenders and their underwriting and loan processing counterparts are highly skilled and trained at uncovering fibs, fabrications and falsehoods when borrowers attempt to avoid fully disclose their financial information.. They can check, cross-reference and monitor a slew of public records, court judgments, title reports, credit histories and data bases, both known and little known. Also, if they believe your loan application has a hint of fraud in it, they can file a suspicious activity report (SAR), which could trigger a federal investigation.
So, be completely transparent and forthcoming on your loan application. When you hear your loan has been approved, you’ll want to shout the news from the rooftops, knowing you have absolutely nothing to hide.