I recently came across a New York Times article that showed how expensive it is for lenders when potential homebuyers lie on their mortgage applications. While banks do pay a price when homebuyers are untruthful about their finances to get a mortgage, they aren’t the only ones who suffer financially. If you think your little white lies aren’t a big deal, make sure you know the consequences involved, as well as the tangible and intangible costs.
Your loan application may be denied
Overstating your income is a common white lie among loan applicants, but you shouldn’t make the mistake of assuming the lender won’t catch on. The days of banks taking your word for it are long gone. Now, federal mortgage rules require lenders to make sure borrowers have the ability to repay the loan before granting one.
Aside from your income, your debts and assets are also going to come under scrutiny. Trying to dispute a debt that you know you’re responsible for or manipulate bank deposits so it looks like you have more money than you do just isn’t going to fly. If a lender finds out that you’ve been making things up as you go, they could deny your loan application outright.
You could also be out any earnest money you’ve put up if you’re already under contract. Earnest money deposits are typically between 1 and 3 percent of the purchase price. On a $250,000 loan, you’d stand to lose $2,500 to $7,500 to the seller unless the contract includes a contingency that allows you to get it back. That’s a substantial amount of money you’re putting on the line for the sake of a white lie.
The lender could call the loan in full
While losing out on buying your dream home and having to forfeit your earnest money is certainly bad, it’s far from being the worst-case scenario. The consequences can be much worse if the fact that you fudged the truth comes to light after the deal is done.
If the lender finds out you lied, they could decide to call the loan as payable. That means you’d have to pony up the full amount of the mortgage or face foreclosure. Even if the lender doesn’t go that route, they may still be able to change the terms of the loan by increasing your interest rate or upping the monthly payments. That can have serious implications for the long-term cost of the home.
For instance, let’s say you take out a $250,000 mortgage loan at a rate of 4 percent. Over a 30-year pay off period, the loan’s going to cost you $180,000 in interest. If your lender uncovers a half-truth with your original application and increases your rate by just a half percent as a penalty, you’re looking at closer to $210,000 in interest and a monthly payment that’s roughly $75 higher.
You could face criminal penalties
Mortgage fraud is all about the intent to deceive the lender, not how you actually go about doing it. Whether you lie about something big or small, it all falls under the umbrella of criminal activity. Under federal law, mortgage fraud is punishable by a fine of up to $1 million. At the state level, the fine depends on whether the fraud is classified as a felony or misdemeanor.
Aside from the financial penalty, there’s also the very real possibility of serving prison time if you’re found guilty of mortgage fraud. A federal conviction can result in a term of up to 30 years and you could receive an additional sentence in state prison. The bottom line? Unless you’re just really fond of orange jumpsuits, forget about lying on a mortgage application.
Mortgage fraud pushes the cost of buying higher
Mortgage fraud hurts lenders in a couple of different ways. First, there’s the possibility of losing money if the buyer’s deception leads to foreclosure. Depending on the value of the mortgage and the home, the loss can easily come to tens of thousands of dollars for a single property. Not only that but the loan investor could require the lender to buy the mortgage back, which means another financial hit.
To soften the blow, lenders may pass on the cost to buyers in the form of higher fees or interest rates. We’ve already seen how even a minor increase in the interest rate can tax your wallet but higher closing costs can take an even bigger bite. Closing costs are the different fees you pay when it’s time to sign off on the loan and they typically come to between two and five percent of the home’s value.
That’s $2,000 to $5,000 for every $100,000 you borrow and if the lender is pushing you towards the higher end, that can really turn up the heat financially. That’s definitely unfair to buyers who’ve been forthcoming in filling out their loan applications and it’s a perfect example of why using dishonesty to get a mortgage doesn’t pay.
Lying on a mortgage application or any loan application for that matter is just plain dumb. Even if it’s not a lie that’s big enough to land you in jail, the risk of losing money or killing the mortgage deal altogether just isn’t worth it.
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